Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) shares have continued their recent momentum with a 30% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Following the firm bounce in price, when almost half of the companies in China's Communications industry have price-to-sales ratios (or "P/S") below 5.7x, you may consider Advanced Fiber Resources (Zhuhai) as a stock not worth researching with its 13.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Advanced Fiber Resources (Zhuhai)'s Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Advanced Fiber Resources (Zhuhai) has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Advanced Fiber Resources (Zhuhai)'s is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 37%. The strong recent performance means it was also able to grow revenue by 46% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 25% over the next year. That's shaping up to be materially lower than the 40% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Advanced Fiber Resources (Zhuhai)'s P/S is outpacing its industry peers. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Advanced Fiber Resources (Zhuhai)'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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Advanced Fiber Resources (Zhuhai), this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Advanced Fiber Resources (Zhuhai) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.