Aofu Environmental Technology Co.,Ltd.'s (SHSE:688021) Stock Retreats 26% But Revenues Haven't Escaped The Attention Of Investors

To the annoyance of some shareholders, Aofu Environmental Technology Co.,Ltd. (SHSE:688021) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 57% share price decline.

Even after such a large drop in price, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.6x, you may still consider Aofu Environmental TechnologyLtd as a stock probably not worth researching with its 3.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Aofu Environmental TechnologyLtd

What Does Aofu Environmental TechnologyLtd's P/S Mean For Shareholders?

Recent times have been advantageous for Aofu Environmental TechnologyLtd as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Aofu Environmental TechnologyLtd.

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

Aofu Environmental TechnologyLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 63% gain to the company's top line. The latest three year period has also seen a 5.8% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 109% during the coming year according to the four analysts following the company. With the industry only predicted to deliver 28%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Aofu Environmental TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Aofu Environmental TechnologyLtd's P/S?

There's still some elevation in Aofu Environmental TechnologyLtd's P/S, even if the same can't be said for its share price recently. 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.

As we suspected, our examination of Aofu Environmental TechnologyLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Aofu Environmental TechnologyLtd you should be aware of.

If these risks are making you reconsider your opinion on Aofu Environmental TechnologyLtd, 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.