Sensteed Hi-Tech Group (SZSE:000981) shares have continued their recent momentum with a 35% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 4.6% isn't as impressive.

Since its price has surged higher, when almost half of the companies in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Sensteed Hi-Tech Group as a stock probably not worth researching with its 3.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Sensteed Hi-Tech Group's P/S Mean For Shareholders?

For example, consider that Sensteed Hi-Tech Group's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Sensteed Hi-Tech Group would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 3.7% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 7.7% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Sensteed Hi-Tech Group's P/S exceeds that of its industry peers. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Sensteed Hi-Tech Group's P/S?

Sensteed Hi-Tech Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Sensteed Hi-Tech Group revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Sensteed Hi-Tech Group you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.