Despite an already strong run, AVIC (Chengdu)UAS Co., Ltd. (SHSE:688297) shares have been powering on, with a gain of 33% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

Since its price has surged higher, you could be forgiven for thinking AVIC (Chengdu)UAS is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 19.8x, considering almost half the companies in China's Aerospace & Defense industry have P/S ratios below 8.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has AVIC (Chengdu)UAS Performed Recently?

AVIC (Chengdu)UAS has been struggling lately as its revenue has declined faster than most other companies. One possibility is that the P/S ratio is high because investors think the company will turn things around completely and accelerate past most others in the industry. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 steep as AVIC (Chengdu)UAS' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. As a result, revenue from three years ago have also fallen 31% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 108% over the next year. With the industry only predicted to deliver 50%, the company is positioned for a stronger revenue result.

With this information, we can see why AVIC (Chengdu)UAS 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.

What We Can Learn From AVIC (Chengdu)UAS' P/S?

The strong share price surge has lead to AVIC (Chengdu)UAS' P/S soaring as well. 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 look into AVIC (Chengdu)UAS shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

And what about other risks? Every company has them, and we've spotted 1 warning sign for AVIC (Chengdu)UAS you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.