Guangdong Transtek Medical Electronics Co., Ltd (SZSE:300562) shareholders are no doubt pleased to see that the share price has bounced 40% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.1% over the last year.

Even after such a large jump in price, Guangdong Transtek Medical Electronics' price-to-sales (or "P/S") ratio of 2.5x might still make it look like a strong buy right now compared to the wider Medical Equipment industry in China, where around half of the companies have P/S ratios above 6.2x and even P/S above 10x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does Guangdong Transtek Medical Electronics' Recent Performance Look Like?

While the industry has experienced revenue growth lately, Guangdong Transtek Medical Electronics' revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Guangdong Transtek Medical Electronics' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered a frustrating 40% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 25% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 33% during the coming year according to the sole analyst following the company. That's shaping up to be materially higher than the 26% growth forecast for the broader industry.

With this information, we find it odd that Guangdong Transtek Medical Electronics is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Guangdong Transtek Medical Electronics' P/S

Guangdong Transtek Medical Electronics' recent share price jump still sees fails to bring its P/S alongside the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

To us, it seems Guangdong Transtek Medical Electronics currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guangdong Transtek Medical Electronics you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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