Despite an already strong run, Fujian Yongfu Power Engineering Co.,Ltd. (SZSE:300712) shares have been powering on, with a gain of 34% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Although its price has surged higher, Fujian Yongfu Power EngineeringLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.6x, considering almost half of all companies in the Professional Services industry in China have P/S ratios greater than 4.2x and even P/S higher than 9x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Fujian Yongfu Power EngineeringLtd's P/S Mean For Shareholders?

Recent times haven't been great for Fujian Yongfu Power EngineeringLtd as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

The only time you'd be truly comfortable seeing a P/S as low as Fujian Yongfu Power EngineeringLtd's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 18%. Pleasingly, revenue has also lifted 76% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 159% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 28%, which is noticeably less attractive.

With this information, we find it odd that Fujian Yongfu Power EngineeringLtd is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift Fujian Yongfu Power EngineeringLtd's P/S close to the industry median. 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.

A look at Fujian Yongfu Power EngineeringLtd's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Fujian Yongfu Power EngineeringLtd (2 make us uncomfortable!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Fujian Yongfu Power EngineeringLtd, 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.