Zhuhai Comleader Information Science & Technology Co., Ltd. (SHSE:688175) shares have had a really impressive month, gaining 44% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.9% over the last year.

Following the firm bounce in price, Zhuhai Comleader Information Science & Technology's price-to-sales (or "P/S") ratio of 8.6x might make it look like a strong sell right now compared to other companies in the Communications industry in China, where around half of the companies have P/S ratios below 5.4x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Zhuhai Comleader Information Science & Technology's P/S Mean For Shareholders?

For example, consider that Zhuhai Comleader Information Science & Technology's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Zhuhai Comleader Information Science & Technology's Revenue Growth Trending?

Zhuhai Comleader Information Science & Technology's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 40% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Zhuhai Comleader Information Science & Technology is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Zhuhai Comleader Information Science & Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Zhuhai Comleader Information Science & Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Zhuhai Comleader Information Science & Technology (2 are a bit concerning) you should be aware of.

If you're unsure about the strength of Zhuhai Comleader Information Science & Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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