Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) shareholders won't be pleased to see that the share price has had a very rough month, dropping 39% and undoing the prior period's positive performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 163%.

In spite of the heavy fall in price, you could still be forgiven for thinking Ningbo Shenglong Automotive Powertrain SystemLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.8x, considering almost half the companies in China's Auto Components industry have P/S ratios below 2.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has Ningbo Shenglong Automotive Powertrain SystemLtd Performed Recently?

Ningbo Shenglong Automotive Powertrain SystemLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Ningbo Shenglong Automotive Powertrain SystemLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Ningbo Shenglong Automotive Powertrain SystemLtd's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.5%. Regardless, revenue has managed to lift by a handy 17% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 38% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

In light of this, it's understandable that Ningbo Shenglong Automotive Powertrain SystemLtd's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Ningbo Shenglong Automotive Powertrain SystemLtd's P/S?

A significant share price dive has done very little to deflate Ningbo Shenglong Automotive Powertrain SystemLtd's very lofty P/S. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Ningbo Shenglong Automotive Powertrain SystemLtd maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Auto Components industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Ningbo Shenglong Automotive Powertrain SystemLtd (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Ningbo Shenglong Automotive Powertrain SystemLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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