Despite an already strong run, Shenzhen Gongjin Electronics Co., Ltd. (SHSE:603118) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 32%.

Although its price has surged higher, Shenzhen Gongjin Electronics may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.1x, since almost half of all companies in the Communications industry in China have P/S ratios greater than 4.8x and even P/S higher than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

What Does Shenzhen Gongjin Electronics' P/S Mean For Shareholders?

Shenzhen Gongjin Electronics could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For Shenzhen Gongjin Electronics?

In order to justify its P/S ratio, Shenzhen Gongjin Electronics would need to produce anemic growth that's substantially trailing the industry.

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 17%. As a result, revenue from three years ago have also fallen 24% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 12% as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 37%, which is noticeably more attractive.

With this information, we can see why Shenzhen Gongjin Electronics is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Shenzhen Gongjin Electronics' P/S

Shenzhen Gongjin Electronics' recent share price jump still sees fails to bring its P/S alongside the industry median. 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 Shenzhen Gongjin Electronics maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Shenzhen Gongjin Electronics has 1 warning sign we think you should be aware of.

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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