AVIC (Chengdu)UAS Co., Ltd. (SHSE:688297) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Since its price has surged higher, AVIC (Chengdu)UAS' price-to-sales (or "P/S") ratio of 9.3x might make it look like a sell right now compared to the wider Aerospace & Defense industry in China, where around half of the companies have P/S ratios below 7.3x and even P/S below 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How AVIC (Chengdu)UAS Has Been Performing

AVIC (Chengdu)UAS could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, AVIC (Chengdu)UAS would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.9%. Even so, admirably revenue has lifted 119% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 31% over the next year. Meanwhile, the rest of the industry is forecast to expand by 48%, which is noticeably more attractive.

With this information, we find it concerning that AVIC (Chengdu)UAS is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in AVIC (Chengdu)UAS' shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've concluded that AVIC (Chengdu)UAS currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for AVIC (Chengdu)UAS that you should be aware of.

If you're unsure about the strength of AVIC (Chengdu)UAS' 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.