Market Participants Recognise Kunshan Asia Aroma Corp., Ltd.'s (SZSE:301220) Revenues Pushing Shares 60% Higher

Kunshan Asia Aroma Corp., Ltd. (SZSE:301220) shares have continued their recent momentum with a 60% gain in the last month alone. The last month tops off a massive increase of 124% in the last year.

Since its price has surged higher, you could be forgiven for thinking Kunshan Asia Aroma is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.4x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Kunshan Asia Aroma

What Does Kunshan Asia Aroma's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Kunshan Asia Aroma has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kunshan Asia Aroma.

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

Kunshan Asia Aroma'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.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. The latest three year period has also seen a 18% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 37% over the next year. With the industry only predicted to deliver 24%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Kunshan Asia Aroma'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 We Can Learn From Kunshan Asia Aroma's P/S?

The strong share price surge has lead to Kunshan Asia Aroma's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Kunshan Asia Aroma shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Kunshan Asia Aroma (2 are a bit unpleasant) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.