Those holding Ferrotec (An Hui) Technology Development Co.,LTD (SZSE:301297) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Since its price has surged higher, you could be forgiven for thinking Ferrotec (An Hui) Technology DevelopmentLTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.7x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Ferrotec (An Hui) Technology DevelopmentLTD Has Been Performing

As an illustration, revenue has deteriorated at Ferrotec (An Hui) Technology DevelopmentLTD over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Ferrotec (An Hui) Technology DevelopmentLTD?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Ferrotec (An Hui) Technology DevelopmentLTD's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 29% shows it's noticeably less attractive.

With this information, we find it concerning that Ferrotec (An Hui) Technology DevelopmentLTD is trading at a P/S higher than the industry. 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.

What Does Ferrotec (An Hui) Technology DevelopmentLTD's P/S Mean For Investors?

Shares in Ferrotec (An Hui) Technology DevelopmentLTD have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Ferrotec (An Hui) Technology DevelopmentLTD 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Ferrotec (An Hui) Technology DevelopmentLTD with six simple checks on some of these key factors.

If you're unsure about the strength of Ferrotec (An Hui) Technology DevelopmentLTD'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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