Despite an already strong run, Shenzhen Etmade Automatic Equipment Co., Ltd. (SZSE:300812) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 118% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Shenzhen Etmade Automatic Equipment's price-to-sales (or "P/S") ratio of 9x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in China, where the median P/S ratio is around 7.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Shenzhen Etmade Automatic Equipment

What Does Shenzhen Etmade Automatic Equipment's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Shenzhen Etmade Automatic Equipment, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

How Is Shenzhen Etmade Automatic Equipment's Revenue Growth Trending?

Shenzhen Etmade Automatic Equipment's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 3.2% gain to the company's revenues. Pleasingly, revenue has also lifted 53% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 40% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Shenzhen Etmade Automatic Equipment's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Shenzhen Etmade Automatic Equipment's P/S?

Shenzhen Etmade Automatic Equipment's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shenzhen Etmade Automatic Equipment revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Before you take the next step, you should know about the 4 warning signs for Shenzhen Etmade Automatic Equipment (3 are potentially serious!) that we have uncovered.

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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