The Bringspring Science and Technology Co., Ltd. (SZSE:300290) share price has done very well over the last month, posting an excellent gain of 50%. The last 30 days bring the annual gain to a very sharp 80%.

Following the firm bounce in price, you could be forgiven for thinking Bringspring Science and Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.1x, considering almost half the companies in China's IT industry have P/S ratios below 3.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Bringspring Science and Technology's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Bringspring Science and Technology over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Bringspring Science and Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Bringspring Science and Technology's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 3.1%. This means it has also seen a slide in revenue over the longer-term as revenue is down 9.6% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 40% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Bringspring Science and Technology's P/S sits above the majority of other companies. 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.

The Key Takeaway

The strong share price surge has lead to Bringspring Science and Technology's P/S soaring as well. 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 Bringspring Science and Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Bringspring Science and Technology that you should be aware of.

If you're unsure about the strength of Bringspring Science and Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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