The Anhui Huaqi Environmental Protection & Technology Co., Ltd. (SZSE:300929) share price has done very well over the last month, posting an excellent gain of 38%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Since its price has surged higher, you could be forgiven for thinking Anhui Huaqi Environmental Protection & Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.9x, considering almost half the companies in China's Commercial Services industry have P/S ratios below 2.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Anhui Huaqi Environmental Protection & Technology's Recent Performance Look Like?

For instance, Anhui Huaqi Environmental Protection & Technology's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Anhui Huaqi Environmental Protection & Technology would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 31%. The last three years don't look nice either as the company has shrunk revenue by 57% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 29% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Anhui Huaqi Environmental Protection & Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On Anhui Huaqi Environmental Protection & Technology's P/S

Shares in Anhui Huaqi Environmental Protection & Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Anhui Huaqi 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Anhui Huaqi Environmental Protection & Technology 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.

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