Linktel Technologies Co., Ltd. (SZSE:301205) shares have had a really impressive month, gaining 55% after a shaky period beforehand. The last 30 days were the cherry on top of the stock's 441% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, Linktel Technologies may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 24.3x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Linktel Technologies

What Does Linktel Technologies' P/S Mean For Shareholders?

For example, consider that Linktel Technologies' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Linktel Technologies' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Linktel Technologies' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 64% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Linktel Technologies is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Linktel Technologies' P/S

The strong share price surge has lead to Linktel Technologies' P/S soaring as well. 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.

The fact that Linktel Technologies 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 3 warning signs for Linktel Technologies (1 is a bit unpleasant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.