Shijiazhuang ChangShan BeiMing Technology Co.,Ltd (SZSE:000158) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 174% in the last twelve months.

Although its price has dipped substantially, when almost half of the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.7x, you may still consider Shijiazhuang ChangShan BeiMing TechnologyLtd as a stock not worth researching with its 4.5x P/S ratio. 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 Shijiazhuang ChangShan BeiMing TechnologyLtd's P/S Mean For Shareholders?

Revenue has risen firmly for Shijiazhuang ChangShan BeiMing TechnologyLtd recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Revenue Growth Trending?

Shijiazhuang ChangShan BeiMing TechnologyLtd'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 decent 9.4% gain to the company's revenues. Still, lamentably revenue has fallen 15% in aggregate from three years ago, which is disappointing. 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 15% shows it's an unpleasant look.

In light of this, it's alarming that Shijiazhuang ChangShan BeiMing TechnologyLtd'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. 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.

The Key Takeaway

A significant share price dive has done very little to deflate Shijiazhuang ChangShan BeiMing TechnologyLtd's very lofty P/S. 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 Shijiazhuang ChangShan BeiMing TechnologyLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Shijiazhuang ChangShan BeiMing TechnologyLtd 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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