Guangdong Aofei Data Technology Co., Ltd.'s (SZSE:300738) 30% Jump Shows Its Popularity With Investors

Guangdong Aofei Data Technology Co., Ltd. (SZSE:300738) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

After such a large jump in price, when almost half of the companies in China's IT industry have price-to-sales ratios (or "P/S") below 3.8x, you may consider Guangdong Aofei Data Technology as a stock not worth researching with its 6.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Guangdong Aofei Data Technology

How Has Guangdong Aofei Data Technology Performed Recently?

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. 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 Guangdong Aofei Data Technology.

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 Guangdong Aofei Data Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 42% gain to the company's top line. The latest three year period has also seen an excellent 64% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 14% 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. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Guangdong Aofei Data Technology's P/S

The strong share price surge has lead to Guangdong Aofei Data Technology's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Guangdong Aofei Data Technology'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.

Having said that, be aware Guangdong Aofei Data Technology is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.