Despite an already strong run, Dongguan Dingtong Precision Metal Co., Ltd. (SHSE:688668) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.

Following the firm bounce in price, you could be forgiven for thinking Dongguan Dingtong Precision Metal is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.5x, considering almost half the companies in China's Electrical industry have P/S ratios below 2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Dongguan Dingtong Precision Metal Has Been Performing

Dongguan Dingtong Precision Metal hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Dongguan Dingtong Precision Metal's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. Even so, admirably revenue has lifted 74% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 72% over the next year. That's shaping up to be materially higher than the 24% growth forecast for the broader industry.

With this information, we can see why Dongguan Dingtong Precision Metal 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.

What Does Dongguan Dingtong Precision Metal's P/S Mean For Investors?

Shares in Dongguan Dingtong Precision Metal have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 established that Dongguan Dingtong Precision Metal maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electrical industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Dongguan Dingtong Precision Metal (2 make us uncomfortable) you should be aware of.

If these risks are making you reconsider your opinion on Dongguan Dingtong Precision Metal, 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.