Anhui Chaoyue Environmental Protection Technology Co., Ltd. (SZSE:301049) shareholders are no doubt pleased to see that the share price has bounced 44% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 3.7% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking Anhui Chaoyue Environmental Protection Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Anhui Chaoyue Environmental Protection Technology Has Been Performing

Revenue has risen firmly for Anhui Chaoyue Environmental Protection Technology recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Anhui Chaoyue Environmental Protection Technology?

Anhui Chaoyue Environmental Protection Technology's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 30%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 13% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 30% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Anhui Chaoyue Environmental Protection Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What Does Anhui Chaoyue Environmental Protection Technology's P/S Mean For Investors?

Anhui Chaoyue Environmental Protection Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Anhui Chaoyue Environmental Protection Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Anhui Chaoyue Environmental Protection Technology has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Anhui Chaoyue Environmental Protection Technology, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com