JoulWatt Technology Co., Ltd. (SHSE:688141) shares have had a really impressive month, gaining 26% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, JoulWatt Technology's price-to-sales (or "P/S") ratio of 12.1x might make it look like a sell right now compared to the wider Semiconductor industry in China, where around half of the companies have P/S ratios below 8.5x and even P/S below 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for JoulWatt Technology

What Does JoulWatt Technology's Recent Performance Look Like?

JoulWatt Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is JoulWatt Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as JoulWatt Technology's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Although pleasingly revenue has lifted 247% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 37% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 22% per year, which is noticeably less attractive.

In light of this, it's understandable that JoulWatt Technology's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From JoulWatt Technology's P/S?

JoulWatt Technology's P/S is on the rise since its shares have risen strongly. 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.

As we suspected, our examination of JoulWatt Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with JoulWatt Technology, and understanding should be part of your investment process.

If you're unsure about the strength of JoulWatt Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.