With a price-to-sales (or "P/S") ratio of 32x Hwa Create Corporation (SZSE:300045) may be sending very bearish signals at the moment, given that almost half of all the Aerospace & Defense companies in China have P/S ratios under 8.4x and even P/S lower than 4x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Hwa Create

What Does Hwa Create's P/S Mean For Shareholders?

Hwa Create certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

If we review the last year of revenue growth, the company posted a worthy increase of 13%. However, this wasn't enough as the latest three year period has seen an unpleasant 26% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 59% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 47%, which is noticeably less attractive.

With this information, we can see why Hwa Create is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Hwa Create's P/S?

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 Hwa Create maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Hwa Create is showing 1 warning sign in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.