Shenzhen SEG Co.,Ltd (SZSE:000058) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Since its price has surged higher, you could be forgiven for thinking Shenzhen SEGLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.6x, considering almost half the companies in China's Real Estate industry have P/S ratios below 1.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen SEGLtd

What Does Shenzhen SEGLtd's P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, Shenzhen SEGLtd's revenue has been unimpressive. One possibility is that the P/S is high because investors think the benign revenue growth will improve 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.

Do Revenue Forecasts Match The High P/S Ratio?

Shenzhen SEGLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Although pleasingly revenue has lifted 30% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Comparing that to the industry, which is predicted to deliver 10% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that Shenzhen SEGLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Bottom Line On Shenzhen SEGLtd's P/S

Shares in Shenzhen SEGLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shenzhen SEGLtd revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen SEGLtd (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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.