Guangdong Wanlima Industry Co. ,Ltd (SZSE:300591) shares have had a horrible month, losing 28% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 32% in that time.

Even after such a large drop in price, you could still be forgiven for thinking Guangdong Wanlima Industry Ltd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.7x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Has Guangdong Wanlima Industry Ltd Performed Recently?

Revenue has risen firmly for Guangdong Wanlima Industry Ltd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Wanlima Industry Ltd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. Pleasingly, revenue has also lifted 106% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially lower than the company's recent medium-term annualised growth rates.

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

The Bottom Line On Guangdong Wanlima Industry Ltd's P/S

Despite the recent share price weakness, Guangdong Wanlima Industry Ltd's P/S remains higher than most other companies in the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Guangdong Wanlima Industry Ltd maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Guangdong Wanlima Industry Ltd (2 shouldn't be ignored!) that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.