Guanglian Aviation Industry Co., Ltd. (SZSE:300900) shareholders have had their patience rewarded with a 50% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 48%.

Although its price has surged higher, there still wouldn't be many who think Guanglian Aviation Industry's price-to-sales (or "P/S") ratio of 8.9x is worth a mention when the median P/S in China's Aerospace & Defense industry is similar at about 8.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Guanglian Aviation Industry's P/S Mean For Shareholders?

Recent times have been advantageous for Guanglian Aviation Industry as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Guanglian Aviation Industry's to be considered reasonable.

Retrospectively, the last year delivered a decent 6.6% gain to the company's revenues. Pleasingly, revenue has also lifted 133% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 40% as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 43%, which is not materially different.

With this information, we can see why Guanglian Aviation Industry is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What Does Guanglian Aviation Industry's P/S Mean For Investors?

Its shares have lifted substantially and now Guanglian Aviation Industry's P/S is back within range of the industry median. 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.

A Guanglian Aviation Industry's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Aerospace & Defense industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Guanglian Aviation Industry (1 shouldn't be ignored) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.