You may think that with a price-to-sales (or "P/S") ratio of 12.3x Shanghai Aohua Photoelectricity Endoscope Co., Ltd. (SHSE:688212) is a stock to avoid completely, seeing as almost half of all the Medical Equipment companies in China have P/S ratios under 6.6x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shanghai Aohua Photoelectricity Endoscope

How Has Shanghai Aohua Photoelectricity Endoscope Performed Recently?

Shanghai Aohua Photoelectricity Endoscope certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Shanghai Aohua Photoelectricity Endoscope would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 49%. The latest three year period has also seen an excellent 125% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 48% per annum as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 20% each year growth forecast for the broader industry.

With this in mind, it's not hard to understand why Shanghai Aohua Photoelectricity Endoscope'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.

The Final Word

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 Shanghai Aohua Photoelectricity Endoscope'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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shanghai Aohua Photoelectricity Endoscope you should know about.

If these risks are making you reconsider your opinion on Shanghai Aohua Photoelectricity Endoscope, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.