Farsoon Technologies Co., Ltd.'s (SHSE:688433) price-to-sales (or "P/S") ratio of 14.6x may look like a poor investment opportunity when you consider close to half the companies in the Machinery industry in China have P/S ratios below 2.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Farsoon Technologies' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Farsoon Technologies has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Farsoon Technologies' Revenue Growth Trending?

Farsoon Technologies' 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.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.8% last year. This was backed up an excellent period prior to see revenue up by 74% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 92% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 24% growth forecast for the broader industry.

With this information, we can see why Farsoon Technologies is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Farsoon Technologies' P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Farsoon Technologies maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Machinery industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for Farsoon Technologies you should be aware of, and 1 of them doesn't sit too well with us.

If you're unsure about the strength of Farsoon Technologies' 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.