With Anhui Estone Materials Technology Co.,Ltd (SHSE:688733) It Looks Like You'll Get What You Pay For

Anhui Estone Materials Technology Co.,Ltd's (SHSE:688733) price-to-sales (or "P/S") ratio of 6.2x may look like a poor investment opportunity when you consider close to half the companies in the Chemicals industry in China have P/S ratios below 1.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Anhui Estone Materials TechnologyLtd

How Has Anhui Estone Materials TechnologyLtd Performed Recently?

While the industry has experienced revenue growth lately, Anhui Estone Materials TechnologyLtd's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

The only time you'd be truly comfortable seeing a P/S as steep as Anhui Estone Materials TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.2%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 40% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 82% as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 24% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Anhui Estone Materials TechnologyLtd's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Anhui Estone Materials TechnologyLtd's P/S Mean For Investors?

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 Anhui Estone Materials 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. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Anhui Estone Materials TechnologyLtd is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

If you're unsure about the strength of Anhui Estone Materials TechnologyLtd'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.