When close to half the companies in the Forestry industry in China have price-to-sales ratios (or "P/S") below 1.6x, you may consider Dongguan Golden Sun Abrasives Co.,Ltd (SZSE:300606) as a stock to avoid entirely with its 8.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Dongguan Golden Sun AbrasivesLtd

What Does Dongguan Golden Sun AbrasivesLtd's Recent Performance Look Like?

Revenue has risen firmly for Dongguan Golden Sun AbrasivesLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Dongguan Golden Sun AbrasivesLtd?

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

If we review the last year of revenue growth, the company posted a worthy increase of 11%. The solid recent performance means it was also able to grow revenue by 18% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Dongguan Golden Sun AbrasivesLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

The fact that Dongguan Golden Sun AbrasivesLtd 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. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It is also worth noting that we have found 4 warning signs for Dongguan Golden Sun AbrasivesLtd (3 are potentially serious!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Dongguan Golden Sun AbrasivesLtd, 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.