The Ningbo Henghe Precision Industry Co.,Ltd. (SZSE:300539) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Ningbo Henghe Precision IndustryLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.8x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.3x. 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.

See our latest analysis for Ningbo Henghe Precision IndustryLtd

What Does Ningbo Henghe Precision IndustryLtd's Recent Performance Look Like?

Ningbo Henghe Precision IndustryLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

In order to justify its P/S ratio, Ningbo Henghe Precision IndustryLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 2.5% gain to the company's revenues. Revenue has also lifted 21% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 32% shows it's noticeably less attractive.

With this in mind, we find it worrying that Ningbo Henghe Precision IndustryLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

The strong share price surge has lead to Ningbo Henghe Precision IndustryLtd's P/S soaring as well. 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.

The fact that Ningbo Henghe Precision IndustryLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Ningbo Henghe Precision IndustryLtd is showing 1 warning sign in our investment analysis, you should know about.

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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