Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) Investors Are Less Pessimistic Than Expected

When you see that almost half of the companies in the Communications industry in China have price-to-sales ratios (or "P/S") below 3.8x, Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) looks to be giving off strong sell signals with its 12.8x 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.

Check out our latest analysis for Advanced Fiber Resources (Zhuhai)

What Does Advanced Fiber Resources (Zhuhai)'s P/S Mean For Shareholders?

Advanced Fiber Resources (Zhuhai) could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Advanced Fiber Resources (Zhuhai)'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?

Advanced Fiber Resources (Zhuhai)'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.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.9% last year. Revenue has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 40% over the next year. That's shaping up to be materially lower than the 48% growth forecast for the broader industry.

In light of this, it's alarming that Advanced Fiber Resources (Zhuhai)'s P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Advanced Fiber Resources (Zhuhai), this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Advanced Fiber Resources (Zhuhai) that we have uncovered.

If you're unsure about the strength of Advanced Fiber Resources (Zhuhai)'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com