Unfortunately for some shareholders, the China Nature Energy Technology Holdings Limited (HKG:1597) share price has dived 26% in the last thirty days, prolonging recent pain. Still, a bad month hasn't completely ruined the past year with the stock gaining 58%, which is great even in a bull market.

In spite of the heavy fall in price, when almost half of the companies in Hong Kong's Electrical industry have price-to-sales ratios (or "P/S") below 0.5x, you may still consider China Nature Energy Technology Holdings as a stock not worth researching with its 4.3x 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.

How China Nature Energy Technology Holdings Has Been Performing

The revenue growth achieved at China Nature Energy Technology Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For China Nature Energy Technology Holdings?

China Nature Energy Technology Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 29%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 16% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 18% 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 China Nature Energy Technology Holdings is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 China Nature Energy Technology Holdings' P/S

China Nature Energy Technology Holdings' shares may have suffered, but its P/S remains high. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that China Nature Energy Technology Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

Before you settle on your opinion, we've discovered 1 warning sign for China Nature Energy Technology Holdings that you should be aware of.

If these risks are making you reconsider your opinion on China Nature Energy Technology Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.