Shanghai Aohua Photoelectricity Endoscope Co., Ltd.'s (SHSE:688212) Price In Tune With Revenues

You may think that with a price-to-sales (or "P/S") ratio of 7.3x Shanghai Aohua Photoelectricity Endoscope Co., Ltd. (SHSE:688212) is a stock to potentially avoid, seeing as almost half of all the Medical Equipment companies in China have P/S ratios under 6.1x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shanghai Aohua Photoelectricity Endoscope

What Does Shanghai Aohua Photoelectricity Endoscope's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Shanghai Aohua Photoelectricity Endoscope has been doing relatively well. 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.

Keen to find out how analysts think Shanghai Aohua Photoelectricity Endoscope's future stacks up against the industry? In that case, our free report is a great place to start.

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 Shanghai Aohua Photoelectricity Endoscope's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 120% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 28% each year as estimated by the six analysts watching the company. With the industry only predicted to deliver 11% per annum, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Shanghai Aohua Photoelectricity Endoscope'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.

The Key Takeaway

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.

As we suspected, our examination of Shanghai Aohua Photoelectricity Endoscope's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Shanghai Aohua Photoelectricity Endoscope has 3 warning signs (and 1 which is significant) we think you should know about.

If you're unsure about the strength of Shanghai Aohua Photoelectricity Endoscope's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.