The Bafang Electric (Suzhou) Co.,Ltd. (SHSE:603489) share price has done very well over the last month, posting an excellent gain of 27%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in China's Leisure industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider Bafang Electric (Suzhou)Ltd as a stock probably not worth researching with its 4.4x 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 Bafang Electric (Suzhou)Ltd's P/S Mean For Shareholders?

Bafang Electric (Suzhou)Ltd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Bafang Electric (Suzhou)Ltd's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 28%. This means it has also seen a slide in revenue over the longer-term as revenue is down 44% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 36% as estimated by the three analysts watching the company. With the industry only predicted to deliver 22%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Bafang Electric (Suzhou)Ltd's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Bafang Electric (Suzhou)Ltd's P/S

The large bounce in Bafang Electric (Suzhou)Ltd's shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Bafang Electric (Suzhou)Ltd maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Leisure industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Bafang Electric (Suzhou)Ltd (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Bafang Electric (Suzhou)Ltd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.