Shanghai Emperor of Cleaning Hi-Tech Co., Ltd (SHSE:603200) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.5% over the last year.

After such a large jump in price, given around half the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Shanghai Emperor of Cleaning Hi-Tech as a stock to avoid entirely with its 7.1x P/S ratio. 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 P/S Mean For Shareholders?

Shanghai Emperor of Cleaning Hi-Tech could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. 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?

Shanghai Emperor of Cleaning Hi-Tech'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.

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.

Turning to the outlook, the next year should generate growth of 42% as estimated by the lone analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 30%, which is noticeably less attractive.

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.

What Does Shanghai Emperor of Cleaning Hi-Tech's P/S Mean For Investors?

Shanghai Emperor of Cleaning Hi-Tech's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Shanghai Emperor of Cleaning Hi-Tech's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Shanghai Emperor of Cleaning Hi-Tech is showing 1 warning sign in our investment analysis, you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.