Sichuan Huafeng Technology Co., LTD. (SHSE:688629) shares have had a really impressive month, gaining 43% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

Since its price has surged higher, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Sichuan Huafeng Technology as a stock to avoid entirely with its 17.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Sichuan Huafeng Technology's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Sichuan Huafeng Technology has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. 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?

In order to justify its P/S ratio, Sichuan Huafeng Technology would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 15%. As a result, it also grew revenue by 24% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 88% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 26% growth forecast for the broader industry.

With this information, we can see why Sichuan Huafeng Technology is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to Sichuan Huafeng Technology's P/S soaring as well. 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.

As we suspected, our examination of Sichuan Huafeng Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Sichuan Huafeng Technology you should know about.

If these risks are making you reconsider your opinion on Sichuan Huafeng 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.