The Ningxia Zhongyin Cashmere Co., Ltd. (SZSE:000982) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 35% in that time.

In spite of the heavy fall in price, when almost half of the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.5x, you may still consider Ningxia Zhongyin Cashmere as a stock not worth researching with its 8.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Ningxia Zhongyin Cashmere Has Been Performing

The recent revenue growth at Ningxia Zhongyin Cashmere would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a decent 3.5% gain to the company's revenues. Pleasingly, revenue has also lifted 219% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Ningxia Zhongyin Cashmere's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Ningxia Zhongyin Cashmere's P/S?

A significant share price dive has done very little to deflate Ningxia Zhongyin Cashmere's very lofty P/S. 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've established that Ningxia Zhongyin Cashmere maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

It is also worth noting that we have found 1 warning sign for Ningxia Zhongyin Cashmere that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.