There's Reason For Concern Over China Strategic Technology Group Limited's (HKG:1725) Massive 47% Price Jump

China Strategic Technology Group Limited (HKG:1725) shareholders are no doubt pleased to see that the share price has bounced 47% in the last month, although it is still struggling to make up recently lost ground. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

After such a large jump in price, given close to half the companies operating in Hong Kong's Electronic industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider China Strategic Technology Group as a stock to potentially avoid with its 1.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for China Strategic Technology Group

How China Strategic Technology Group Has Been Performing

For instance, China Strategic Technology Group's receding revenue in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Strategic Technology Group will help you shine a light on its historical performance.

How Is China Strategic Technology Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as China Strategic Technology Group's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 52% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that China Strategic Technology Group 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. 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 Bottom Line On China Strategic Technology Group's P/S

The large bounce in China Strategic Technology Group's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of China Strategic Technology Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 4 warning signs for China Strategic Technology Group (2 are significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on China Strategic Technology Group, 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.