Shenzhen Prolto Supply Chain Management Co.,Ltd (SZSE:002769) shareholders are no doubt pleased to see that the share price has bounced 46% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in China's Logistics industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider Shenzhen Prolto Supply Chain ManagementLtd as a stock not worth researching with its 4x 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.

What Does Shenzhen Prolto Supply Chain ManagementLtd's Recent Performance Look Like?

For example, consider that Shenzhen Prolto Supply Chain ManagementLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Shenzhen Prolto Supply Chain ManagementLtd?

Shenzhen Prolto Supply Chain ManagementLtd'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 57%. As a result, revenue from three years ago have also fallen 81% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this in mind, we find it worrying that Shenzhen Prolto Supply Chain ManagementLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Shenzhen Prolto Supply Chain ManagementLtd's P/S Mean For Investors?

The strong share price surge has lead to Shenzhen Prolto Supply Chain ManagementLtd's P/S soaring as well. 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.

We've established that Shenzhen Prolto Supply Chain ManagementLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

Having said that, be aware Shenzhen Prolto Supply Chain ManagementLtd is showing 2 warning signs in our investment analysis, and 1 of those is significant.

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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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.