SGSG Science&Technology Co., Ltd. Zhuhai's (SZSE:300561) price-to-sales (or "P/S") ratio of 24.7x might make it look like a strong sell right now compared to the Electronic industry in China, where around half of the companies have P/S ratios below 4.7x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for SGSG Science&Technology Zhuhai

What Does SGSG Science&Technology Zhuhai's P/S Mean For Shareholders?

For example, consider that SGSG Science&Technology Zhuhai's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For SGSG Science&Technology Zhuhai?

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

Retrospectively, the last year delivered a frustrating 6.4% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. 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 27% 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 SGSG Science&Technology Zhuhai's P/S exceeds that of its industry peers. 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.

What Does SGSG Science&Technology Zhuhai's P/S Mean For Investors?

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.

We've established that SGSG Science&Technology Zhuhai currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware SGSG Science&Technology Zhuhai is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

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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