The Shanghai General Healthy Information and Technology Co., Ltd. (SHSE:605186) share price has done very well over the last month, posting an excellent gain of 33%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

Since its price has surged higher, Shanghai General Healthy Information and Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 13.7x, since almost half of all companies in the Medical Equipment industry in China have P/S ratios under 6.4x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Shanghai General Healthy Information and Technology Has Been Performing

Shanghai General Healthy Information and Technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

Shanghai General Healthy Information and 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 9.3% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 34% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 63% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 27%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Shanghai General Healthy Information and Technology's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shanghai General Healthy Information and 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 look into Shanghai General Healthy Information and Technology shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 2 warning signs for Shanghai General Healthy Information and Technology that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.