Guangdong Anda Automation Solutions Co.,Ltd. (SHSE:688125) shareholders have had their patience rewarded with a 77% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 32%.

Following the firm bounce in price, you could be forgiven for thinking Guangdong Anda Automation SolutionsLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.6x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Guangdong Anda Automation SolutionsLtd Performed Recently?

With revenue growth that's superior to most other companies of late, Guangdong Anda Automation SolutionsLtd has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Guangdong Anda Automation SolutionsLtd'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 exceptional 54% gain to the company's top line. Revenue has also lifted 10% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 12% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader industry.

In light of this, it's alarming that Guangdong Anda Automation SolutionsLtd's P/S sits above the majority of other companies. 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 We Can Learn From Guangdong Anda Automation SolutionsLtd's P/S?

Guangdong Anda Automation SolutionsLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Guangdong Anda Automation SolutionsLtd, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Guangdong Anda Automation SolutionsLtd with six simple checks will allow you to discover any risks that could be an issue.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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