Shanghai Emperor of Cleaning Hi-Tech Co., Ltd (SHSE:603200) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Shanghai Emperor of Cleaning Hi-Tech is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.2x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Shanghai Emperor of Cleaning Hi-Tech's Recent Performance Look Like?

Shanghai Emperor of Cleaning Hi-Tech hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Shanghai Emperor of Cleaning Hi-Tech's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shanghai Emperor of Cleaning Hi-Tech's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. This means it has also seen a slide in revenue over the longer-term as revenue is down 16% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 42% over the next year. That's shaping up to be materially higher than the 30% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Shanghai Emperor of Cleaning Hi-Tech's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shanghai Emperor of Cleaning Hi-Tech's P/S

Shanghai Emperor of Cleaning Hi-Tech's shares may have suffered, but its P/S remains high. 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.

Our look into Shanghai Emperor of Cleaning Hi-Tech shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about this 1 warning sign we've spotted with Shanghai Emperor of Cleaning Hi-Tech.

If these risks are making you reconsider your opinion on Shanghai Emperor of Cleaning Hi-Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.