Zhongyan Technology Co., Ltd. (SZSE:003001) shares have continued their recent momentum with a 37% gain in the last month alone. The last month tops off a massive increase of 185% in the last year.

After such a large jump in price, you could be forgiven for thinking Zhongyan Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8x, considering almost half the companies in China's Construction industry have P/S ratios below 1.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Zhongyan Technology's Recent Performance Look Like?

With revenue that's retreating more than the industry's average of late, Zhongyan Technology has been very sluggish. Perhaps the market is predicting a change in fortunes for the company and is expecting them to blow past the rest of the industry, elevating the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Zhongyan Technology's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. The last three years don't look nice either as the company has shrunk revenue by 41% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 54% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 13%, which is noticeably less attractive.

With this information, we can see why Zhongyan Technology is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has lead to Zhongyan Technology's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Zhongyan Technology shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Zhongyan Technology is showing 1 warning sign in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.