Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) 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 annual gain comes to 218% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, you could be forgiven for thinking Dongguan Chitwing Technology is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.1x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Dongguan Chitwing Technology's P/S Mean For Shareholders?

For example, consider that Dongguan Chitwing Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Dongguan Chitwing Technology's Revenue Growth Trending?

Dongguan Chitwing Technology's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. As a result, revenue from three years ago have also fallen 25% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Dongguan Chitwing Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Dongguan Chitwing Technology's P/S?

Dongguan Chitwing Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've established that Dongguan Chitwing Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You always need to take note of risks, for example - Dongguan Chitwing Technology has 3 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Dongguan Chitwing Technology, 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.