Guangdong Aofei Data Technology Co., Ltd.'s (SZSE:300738) price-to-sales (or "P/S") ratio of 7.3x might make it look like a strong sell right now compared to the IT industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. 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.

How Guangdong Aofei Data Technology Has Been Performing

With revenue growth that's superior to most other companies of late, Guangdong Aofei Data Technology has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Guangdong Aofei Data Technology's Revenue Growth Trending?

Guangdong Aofei Data Technology'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.

Taking a look back first, we see that the company grew revenue by an impressive 43% last year. The latest three year period has also seen an excellent 60% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 21% per annum over the next three years. With the industry only predicted to deliver 16% per annum, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Guangdong Aofei Data Technology's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 Guangdong Aofei Data Technology maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Guangdong Aofei Data Technology is showing 4 warning signs in our investment analysis, and 2 of those can't be ignored.

If these risks are making you reconsider your opinion on Guangdong Aofei Data Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.