Guangdong Modern High-tech Fiber Co., Ltd (SZSE:300876) shares have had a really impressive month, gaining 40% 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 24% over that time.

After such a large jump in price, you could be forgiven for thinking Guangdong Modern High-tech Fiber is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.9x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Guangdong Modern High-tech Fiber's P/S Mean For Shareholders?

Recent times have been advantageous for Guangdong Modern High-tech Fiber as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Guangdong Modern High-tech Fiber?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Modern High-tech Fiber's to be considered reasonable.

Retrospectively, the last year delivered a decent 9.6% gain to the company's revenues. The latest three year period has also seen a 18% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 26% as estimated by the lone analyst watching the company. With the industry only predicted to deliver 21%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Guangdong Modern High-tech Fiber's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Guangdong Modern High-tech Fiber's P/S

Guangdong Modern High-tech Fiber's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Guangdong Modern High-tech Fiber maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Chemicals industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Guangdong Modern High-tech Fiber that we have uncovered.

If you're unsure about the strength of Guangdong Modern High-tech Fiber'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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