Shenzhen Urban Transport Planning Center Co., Ltd. (SZSE:301091) shares have continued their recent momentum with a 85% gain in the last month alone. The annual gain comes to 149% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Shenzhen Urban Transport Planning Center as a stock not worth researching with its 10.4x 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 Shenzhen Urban Transport Planning Center's P/S Mean For Shareholders?

The revenue growth achieved at Shenzhen Urban Transport Planning Center over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Shenzhen Urban Transport Planning Center would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. The solid recent performance means it was also able to grow revenue by 23% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 87% shows it's noticeably less attractive.

With this information, we find it concerning that Shenzhen Urban Transport Planning Center 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.

What We Can Learn From Shenzhen Urban Transport Planning Center's P/S?

Shenzhen Urban Transport Planning Center's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that Shenzhen Urban Transport Planning Center currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Urban Transport Planning Center, and understanding them should be part of your investment process.

If you're unsure about the strength of Shenzhen Urban Transport Planning Center'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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