The SinoSun Technology Co. Ltd. (SZSE:300333) share price has fared very poorly over the last month, falling by a substantial 33%. Looking at the bigger picture, even after this poor month the stock is up 86% in the last year.

Although its price has dipped substantially, SinoSun Technology may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 21.1x, since almost half of all companies in the Electronic industry in China have P/S ratios under 4.4x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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What Does SinoSun Technology's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for SinoSun Technology, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For SinoSun Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like SinoSun Technology's to be considered reasonable.

Retrospectively, the last year delivered a decent 4.2% gain to the company's revenues. Still, lamentably revenue has fallen 25% in aggregate from three years ago, which is disappointing. 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 in mind, we find it worrying that SinoSun Technology's P/S exceeds that of its industry peers. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On SinoSun Technology's P/S

SinoSun Technology's shares may have suffered, but its P/S remains high. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of SinoSun Technology 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. 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.

Having said that, be aware SinoSun Technology is showing 2 warning signs in our investment analysis, you should know about.

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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.