Despite an already strong run, DuoLun Technology Corporation Ltd. (SHSE:603528) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.6% isn't as attractive.

Since its price has surged higher, DuoLun Technology's price-to-sales (or "P/S") ratio of 13.5x might make it look like a strong sell right now compared to other companies in the Electronic industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How DuoLun Technology Has Been Performing

DuoLun Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For DuoLun Technology?

The only time you'd be truly comfortable seeing a P/S as steep as DuoLun Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 36% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 23% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 27% growth forecast for the broader industry.

With this information, we find it concerning that DuoLun Technology is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On DuoLun Technology's P/S

The strong share price surge has lead to DuoLun Technology's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It comes as a surprise to see DuoLun Technology trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

You always need to take note of risks, for example - DuoLun Technology has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.