Guang Dong Qun Xing Toys Joint-Stockco.,Ltd. (SZSE:002575) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

After such a large jump in price, when almost half of the companies in China's Leisure industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Guang Dong Qun Xing Toys co.Ltd as a stock not worth researching with its 19x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Guang Dong Qun Xing Toys co.Ltd Has Been Performing

Guang Dong Qun Xing Toys co.Ltd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. 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?

Guang Dong Qun Xing Toys co.Ltd'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.

Retrospectively, the last year delivered an explosive gain to the company's top line. The latest three year period has also seen an excellent 76% overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 21% shows it's about the same on an annualised basis.

In light of this, it's curious that Guang Dong Qun Xing Toys co.Ltd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Guang Dong Qun Xing Toys co.Ltd's P/S

The strong share price surge has lead to Guang Dong Qun Xing Toys co.Ltd's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We didn't expect to see Guang Dong Qun Xing Toys co.Ltd trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 1 warning sign for Guang Dong Qun Xing Toys co.Ltd that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.