When close to half the companies in the Electrical industry in China have price-to-sales ratios (or "P/S") below 2.6x, you may consider Guoguang Electric Co.,Ltd.Chengdu (SHSE:688776) as a stock to avoid entirely with its 13.7x 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 Guoguang ElectricLtd.Chengdu

What Does Guoguang ElectricLtd.Chengdu's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Guoguang ElectricLtd.Chengdu's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Guoguang ElectricLtd.Chengdu?

Guoguang ElectricLtd.Chengdu'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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 14%. Even so, admirably revenue has lifted 75% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 120% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 31%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Guoguang ElectricLtd.Chengdu's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Guoguang ElectricLtd.Chengdu's P/S?

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 Guoguang ElectricLtd.Chengdu's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for Guoguang ElectricLtd.Chengdu you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.