Despite an already strong run, AA Industrial Belting (Shanghai) Co.,Ltd (SHSE:603580) shares have been powering on, with a gain of 30% in the last thirty days. The last 30 days bring the annual gain to a very sharp 82%.

After such a large jump in price, you could be forgiven for thinking AA Industrial Belting (Shanghai)Ltd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 20.8x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How AA Industrial Belting (Shanghai)Ltd Has Been Performing

As an illustration, revenue has deteriorated at AA Industrial Belting (Shanghai)Ltd over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite 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, AA Industrial Belting (Shanghai)Ltd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's top line. As a result, revenue from three years ago have also fallen 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this in mind, we find it worrying that AA Industrial Belting (Shanghai)Ltd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On AA Industrial Belting (Shanghai)Ltd's P/S

AA Industrial Belting (Shanghai)Ltd'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.

Our examination of AA Industrial Belting (Shanghai)Ltd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - AA Industrial Belting (Shanghai)Ltd has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.