Shenghua Lande Scitech Limited (HKG:8106) shareholders would be excited to see that the share price has had a great month, posting a 60% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Shenghua Lande Scitech's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Electronic industry is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Shenghua Lande Scitech

What Does Shenghua Lande Scitech's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shenghua Lande Scitech over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Shenghua Lande Scitech would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 61% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Shenghua Lande Scitech is trading at a fairly similar P/S compared to 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 on the share price eventually.

What We Can Learn From Shenghua Lande Scitech's P/S?

Its shares have lifted substantially and now Shenghua Lande Scitech's P/S is back within range of the industry median. 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 find it unexpected that Shenghua Lande Scitech trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shenghua Lande Scitech, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Shenghua Lande Scitech, explore our interactive list of high quality stocks to get an idea of what else is out there.

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