When you see that almost half of the companies in the Food industry in China have price-to-sales ratios (or "P/S") below 1.7x, Dongrui Food Group Co., Ltd. (SZSE:001201) looks to be giving off strong sell signals with its 4x 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.

What Does Dongrui Food Group's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Dongrui Food Group'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.

How Is Dongrui Food Group's Revenue Growth Trending?

In order to justify its P/S ratio, Dongrui Food Group would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. As a result, revenue from three years ago have also fallen 21% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 178% over the next year. With the industry only predicted to deliver 16%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Dongrui Food Group's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Dongrui Food Group'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.

We've established that Dongrui Food Group maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Food industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Dongrui Food Group 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.