Shenzhen AOTO Electronics Co., Ltd. (SZSE:002587) shares have had a horrible month, losing 26% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 18% in that time.

Although its price has dipped substantially, when almost half of the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.9x, you may still consider Shenzhen AOTO Electronics as a stock not worth researching with its 6.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has Shenzhen AOTO Electronics Performed Recently?

For example, consider that Shenzhen AOTO Electronics' 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Shenzhen AOTO Electronics' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen AOTO Electronics' 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 18% in aggregate. 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 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Shenzhen AOTO Electronics is trading at a P/S higher than the industry. 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.

The Bottom Line On Shenzhen AOTO Electronics' P/S

Even after such a strong price drop, Shenzhen AOTO Electronics' P/S still exceeds the industry median significantly. 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.

Our examination of Shenzhen AOTO Electronics revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shenzhen AOTO Electronics 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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