Guangdong Faith Long Crystal Technology Co.,LTD. (SZSE:300460) shareholders have had their patience rewarded with a 35% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 7.8% isn't as attractive.

Following the firm bounce in price, you could be forgiven for thinking Guangdong Faith Long Crystal TechnologyLTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.2x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has Guangdong Faith Long Crystal TechnologyLTD Performed Recently?

Guangdong Faith Long Crystal TechnologyLTD certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Guangdong Faith Long Crystal TechnologyLTD's Revenue Growth Trending?

Guangdong Faith Long Crystal TechnologyLTD'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.

Retrospectively, the last year delivered an exceptional 49% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 13% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Guangdong Faith Long Crystal TechnologyLTD's P/S sits above the majority of other companies. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has lead to Guangdong Faith Long Crystal TechnologyLTD's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Guangdong Faith Long Crystal TechnologyLTD currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 3 warning signs for Guangdong Faith Long Crystal TechnologyLTD that we have uncovered.

If these risks are making you reconsider your opinion on Guangdong Faith Long Crystal TechnologyLTD, 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.