Lifan Technology(Group)Co.,Ltd. (SHSE:601777) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

Following the firm bounce in price, given close to half the companies operating in China's Auto industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Lifan Technology(Group)Co.Ltd as a stock to potentially avoid with its 3.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Lifan Technology(Group)Co.Ltd Has Been Performing

For instance, Lifan Technology(Group)Co.Ltd's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. Even so, admirably revenue has lifted 90% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 40% shows it's noticeably less attractive.

With this in mind, we find it worrying that Lifan Technology(Group)Co.Ltd's P/S exceeds that of its industry peers. 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 Lifan Technology(Group)Co.Ltd's P/S Mean For Investors?

Lifan Technology(Group)Co.Ltd's P/S is on the rise since its shares have risen strongly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Lifan Technology(Group)Co.Ltd 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Lifan Technology(Group)Co.Ltd you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.