Despite an already strong run, Suzhou TFC Optical Communication Co., Ltd. (SZSE:300394) shares have been powering on, with a gain of 31% in the last thirty days. The last month tops off a massive increase of 224% in the last year.

Since its price has surged higher, Suzhou TFC Optical Communication's price-to-sales (or "P/S") ratio of 32.9x might make it look like a strong sell right now compared to other companies in the Communications industry in China, where around half of the companies have P/S ratios below 4.7x and even P/S below 2x are quite common. 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 Suzhou TFC Optical Communication's Recent Performance Look Like?

Suzhou TFC Optical Communication 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

In order to justify its P/S ratio, Suzhou TFC Optical Communication would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 62% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 122% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 62% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 50%, which is noticeably less attractive.

With this information, we can see why Suzhou TFC Optical Communication is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has lead to Suzhou TFC Optical Communication'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 Suzhou TFC Optical Communication maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Suzhou TFC Optical Communication has 1 warning sign we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.