Changchun UP Optotech Co.,Ltd. (SZSE:002338) shares have had a really impressive month, gaining 38% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.6% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in China's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 7.1x, you may consider Changchun UP OptotechLtd as a stock probably not worth researching with its 10.7x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Changchun UP OptotechLtd Performed Recently?

Recent times have been advantageous for Changchun UP OptotechLtd as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

In order to justify its P/S ratio, Changchun UP OptotechLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.9% last year. This was backed up an excellent period prior to see revenue up by 41% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.7% during the coming year according to the only analyst following the company. That's shaping up to be materially lower than the 39% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Changchun UP OptotechLtd's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

What Does Changchun UP OptotechLtd's P/S Mean For Investors?

The large bounce in Changchun UP OptotechLtd's shares has lifted the company's P/S handsomely. 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 concluded that Changchun UP OptotechLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Changchun UP OptotechLtd that you should be aware of.

If you're unsure about the strength of Changchun UP OptotechLtd's 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.