Guangdong Aofei Data Technology Co., Ltd. (SZSE:300738) Not Lagging Industry On Growth Or Pricing

You may think that with a price-to-sales (or "P/S") ratio of 6.8x Guangdong Aofei Data Technology Co., Ltd. (SZSE:300738) is a stock to avoid completely, seeing as almost half of all the IT companies in China have P/S ratios under 4.3x and even P/S lower than 2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Guangdong Aofei Data Technology

What Does Guangdong Aofei Data Technology's P/S Mean For Shareholders?

Guangdong Aofei Data Technology certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Guangdong Aofei Data Technology will help you uncover what's on the horizon.

How Is Guangdong Aofei Data Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Guangdong Aofei Data Technology would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 43%. The strong recent performance means it was also able to grow revenue by 60% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 21% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 15% each year, which is noticeably less attractive.

In light of this, it's understandable that Guangdong Aofei Data Technology'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 Does Guangdong Aofei Data Technology's P/S Mean For Investors?

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 Aofei Data Technology maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You need to take note of risks, for example - Guangdong Aofei Data Technology has 3 warning signs (and 2 which are concerning) we think you should know about.

If these risks are making you reconsider your opinion on Guangdong Aofei Data Technology, 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.