The Jiangsu Huasheng Tianlong Photoelectric Co.,Ltd. (SZSE:300029) share price has done very well over the last month, posting an excellent gain of 31%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.3% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Jiangsu Huasheng Tianlong PhotoelectricLtd as a stock not worth researching with its 5.2x 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.

Check out our latest analysis for Jiangsu Huasheng Tianlong PhotoelectricLtd

What Does Jiangsu Huasheng Tianlong PhotoelectricLtd's Recent Performance Look Like?

For example, consider that Jiangsu Huasheng Tianlong PhotoelectricLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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?

Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.7%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

This is in contrast to the rest of the industry, which is expected to grow by 28% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in consideration, it's not hard to understand why Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S

Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

As we suspected, our examination of Jiangsu Huasheng Tianlong PhotoelectricLtd revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Jiangsu Huasheng Tianlong PhotoelectricLtd that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.