Sino Prima Gas Technology Co., Ltd. (SZSE:300483) shares have continued their recent momentum with a 26% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Oil and Gas industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Sino Prima Gas Technology as a stock probably not worth researching with its 2.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Sino Prima Gas Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Sino Prima Gas Technology over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Sino Prima Gas Technology?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Sino Prima Gas Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. As a result, revenue from three years ago have also fallen 22% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 7.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Sino Prima Gas Technology'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 We Can Learn From Sino Prima Gas Technology's P/S?

The large bounce in Sino Prima Gas Technology's shares has lifted the company's P/S handsomely. 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.

We've established that Sino Prima Gas Technology 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Sino Prima Gas Technology, and understanding should be part of your investment process.

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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