Despite an already strong run, Fuchun Technology Co., Ltd. (SZSE:300299) shares have been powering on, with a gain of 28% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, you could be forgiven for thinking Fuchun Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 17.1x, considering almost half the companies in China's Entertainment industry have P/S ratios below 6.8x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Fuchun Technology's Recent Performance Look Like?

For example, consider that Fuchun Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Fuchun Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Fuchun Technology's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 26%. This means it has also seen a slide in revenue over the longer-term as revenue is down 47% 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.

In contrast to the company, the rest of the industry is expected to grow by 32% 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 Fuchun Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Fuchun Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Fuchun 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 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Fuchun Technology that you should be aware of.

If these risks are making you reconsider your opinion on Fuchun Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.