Greatoo Intelligent Equipment Inc. (SZSE:002031) shares have continued their recent momentum with a 65% gain in the last month alone. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

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 Greatoo Intelligent Equipment as a stock not worth researching with its 8.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Greatoo Intelligent Equipment's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Greatoo Intelligent Equipment has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Greatoo Intelligent Equipment?

In order to justify its P/S ratio, Greatoo Intelligent Equipment would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 48% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 46% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 24% shows it's an unpleasant look.

In light of this, it's alarming that Greatoo Intelligent Equipment's P/S sits above the majority of other companies. 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 Does Greatoo Intelligent Equipment's P/S Mean For Investors?

Shares in Greatoo Intelligent Equipment have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Greatoo Intelligent Equipment currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Greatoo Intelligent Equipment you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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