Jiangsu Daybright Intelligent Electric Co.,LTD. (SZSE:300670) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 32% share price drop.

Even after such a large drop in price, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider Jiangsu Daybright Intelligent ElectricLTD as a stock to avoid entirely with its 4.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Jiangsu Daybright Intelligent ElectricLTD's Recent Performance Look Like?

For example, consider that Jiangsu Daybright Intelligent ElectricLTD's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Jiangsu Daybright Intelligent ElectricLTD's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 26% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this in mind, we find it worrying that Jiangsu Daybright Intelligent ElectricLTD's P/S exceeds that of its industry peers. 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 Does Jiangsu Daybright Intelligent ElectricLTD's P/S Mean For Investors?

Even after such a strong price drop, Jiangsu Daybright Intelligent ElectricLTD's P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Jiangsu Daybright Intelligent ElectricLTD 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Jiangsu Daybright Intelligent ElectricLTD you should be aware of.

If you're unsure about the strength of Jiangsu Daybright Intelligent ElectricLTD's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.