Silkroad Visual Technology Co., Ltd. (SZSE:300556) shares have continued their recent momentum with a 26% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.0% over the last year.

Even after such a large jump in price, it's still not a stretch to say that Silkroad Visual Technology's price-to-sales (or "P/S") ratio of 3.6x right now seems quite "middle-of-the-road" compared to the Professional Services industry in China, where the median P/S ratio is around 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 Silkroad Visual Technology's Recent Performance Look Like?

For instance, Silkroad Visual Technology's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Silkroad Visual Technology's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 24% 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.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Silkroad Visual Technology's P/S sits in line with 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 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.

What Does Silkroad Visual Technology's P/S Mean For Investors?

Silkroad Visual Technology's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 Silkroad Visual Technology 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. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Silkroad Visual Technology (1 is potentially serious!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.