Zhejiang Zhaolong Interconnect Technology Co.,Ltd.'s (SZSE:300913) Share Price Not Quite Adding Up

When you see that almost half of the companies in the Electrical industry in China have price-to-sales ratios (or "P/S") below 2.6x, Zhejiang Zhaolong Interconnect Technology Co.,Ltd. (SZSE:300913) looks to be giving off strong sell signals with its 7.3x 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.

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Check out our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

What Does Zhejiang Zhaolong Interconnect TechnologyLtd's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Zhejiang Zhaolong Interconnect TechnologyLtd has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhejiang Zhaolong Interconnect TechnologyLtd.

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

The only time you'd be truly comfortable seeing a P/S as steep as Zhejiang Zhaolong Interconnect TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. The latest three year period has also seen a 26% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 27%, which is noticeably more attractive.

With this information, we find it concerning that Zhejiang Zhaolong Interconnect TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Zhejiang Zhaolong Interconnect TechnologyLtd's P/S Mean For Investors?

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 concluded that Zhejiang Zhaolong Interconnect TechnologyLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

You need to take note of risks, for example - Zhejiang Zhaolong Interconnect TechnologyLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Zhejiang Zhaolong Interconnect TechnologyLtd, 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.