Guangzhou Sanfu New Materials Technology Co.,Ltd (SHSE:688359) shares have had a really impressive month, gaining 47% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 42% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Guangzhou Sanfu New Materials TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.6x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Guangzhou Sanfu New Materials TechnologyLtd's P/S Mean For Shareholders?

Guangzhou Sanfu New Materials TechnologyLtd 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.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangzhou Sanfu New Materials TechnologyLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 47%. Pleasingly, revenue has also lifted 61% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Guangzhou Sanfu New Materials TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Guangzhou Sanfu New Materials TechnologyLtd's P/S Mean For Investors?

Guangzhou Sanfu New Materials TechnologyLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Guangzhou Sanfu New Materials TechnologyLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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 always need to take note of risks, for example - Guangzhou Sanfu New Materials TechnologyLtd has 3 warning signs we think you should be aware of.

If you're unsure about the strength of Guangzhou Sanfu New Materials TechnologyLtd'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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