Changzhou Langbo Sealing Technologies Co.,Ltd. (SHSE:603655) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 28%.

After such a large jump in price, given around half the companies in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Changzhou Langbo Sealing TechnologiesLtd as a stock to avoid entirely with its 12.5x 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.

How Has Changzhou Langbo Sealing TechnologiesLtd Performed Recently?

Revenue has risen firmly for Changzhou Langbo Sealing TechnologiesLtd recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Changzhou Langbo Sealing TechnologiesLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 18%. As a result, it also grew revenue by 16% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Changzhou Langbo Sealing TechnologiesLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Changzhou Langbo Sealing TechnologiesLtd's P/S Mean For Investors?

The strong share price surge has lead to Changzhou Langbo Sealing TechnologiesLtd's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Changzhou Langbo Sealing TechnologiesLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Changzhou Langbo Sealing TechnologiesLtd (1 shouldn't be ignored) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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