The Fujian Acetron New Materials Co., Ltd. (SZSE:300706) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 28% share price drop.

Even after such a large drop in price, given close to half the companies operating in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.1x, you may still consider Fujian Acetron New Materials as a stock to potentially avoid with its 3.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Fujian Acetron New Materials

How Fujian Acetron New Materials Has Been Performing

Fujian Acetron New Materials certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Fujian Acetron New Materials' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 32%. Pleasingly, revenue has also lifted 191% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 24% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 27%, which is not materially different.

In light of this, it's curious that Fujian Acetron New Materials' P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Fujian Acetron New Materials' P/S?

Fujian Acetron New Materials' P/S remain high even after its stock plunged. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Analysts are forecasting Fujian Acetron New Materials' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Fujian Acetron New Materials (1 shouldn't be ignored!) that you should be aware of before investing here.

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.