Bright Oceans Inter-Telecom Corporation (SHSE:600289) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Bright Oceans Inter-Telecom is a stock not worth researching with a price-to-sales ratios (or "P/S") of 5.1x, considering almost half the companies in China's IT industry have P/S ratios below 3.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Bright Oceans Inter-Telecom

What Does Bright Oceans Inter-Telecom's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Bright Oceans Inter-Telecom over the last year, which is not ideal at all. 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.

Although there are no analyst estimates available for Bright Oceans Inter-Telecom, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Bright Oceans Inter-Telecom would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 58% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 47% 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 Bright Oceans Inter-Telecom 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 Final Word

Despite the recent share price weakness, Bright Oceans Inter-Telecom's P/S remains higher than most other companies in the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Bright Oceans Inter-Telecom 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Bright Oceans Inter-Telecom with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Bright Oceans Inter-Telecom, 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.