When close to half the companies in the Commercial Services industry in China have price-to-sales ratios (or "P/S") below 3.5x, you may consider Qingdao Huicheng Environmental Technology Group Co., Ltd. (SZSE:300779) as a stock to avoid entirely with its 7.2x 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.

View our latest analysis for Qingdao Huicheng Environmental Technology Group

What Does Qingdao Huicheng Environmental Technology Group's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Qingdao Huicheng Environmental Technology Group has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Qingdao Huicheng Environmental Technology Group?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Qingdao Huicheng Environmental Technology Group's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 194% last year. The latest three year period has also seen an excellent 168% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 81% as estimated by the sole analyst watching the company. With the industry only predicted to deliver 34%, the company is positioned for a stronger revenue result.

With this information, we can see why Qingdao Huicheng Environmental Technology Group 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 Qingdao Huicheng Environmental Technology Group's P/S?

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.

Our look into Qingdao Huicheng Environmental Technology Group shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Qingdao Huicheng Environmental Technology Group you should be aware of, and 1 of them is significant.

If you're unsure about the strength of Qingdao Huicheng Environmental Technology Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.