Despite an already strong run, Shanghai Aerospace Automobile Electromechanical Co., Ltd. (SHSE:600151) shares have been powering on, with a gain of 37% in the last thirty days. The last 30 days bring the annual gain to a very sharp 32%.

Although its price has surged higher, it's still not a stretch to say that Shanghai Aerospace Automobile Electromechanical's price-to-sales (or "P/S") ratio of 2.3x right now seems quite "middle-of-the-road" compared to the Auto Components industry in China, where the median P/S ratio is around 2.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Shanghai Aerospace Automobile Electromechanical's P/S Mean For Shareholders?

For example, consider that Shanghai Aerospace Automobile Electromechanical's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

The only time you'd be comfortable seeing a P/S like Shanghai Aerospace Automobile Electromechanical's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 46%. This means it has also seen a slide in revenue over the longer-term as revenue is down 7.0% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Shanghai Aerospace Automobile Electromechanical is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Shanghai Aerospace Automobile Electromechanical's P/S

Its shares have lifted substantially and now Shanghai Aerospace Automobile Electromechanical's P/S is back within range of the industry median. 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.

We find it unexpected that Shanghai Aerospace Automobile Electromechanical trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Shanghai Aerospace Automobile Electromechanical with six simple checks on some of these key factors.

If you're unsure about the strength of Shanghai Aerospace Automobile Electromechanical'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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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.