Investor Optimism Abounds Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) But Growth Is Lacking

Advanced Fiber Resources (Zhuhai), Ltd.'s (SZSE:300620) price-to-sales (or "P/S") ratio of 16.6x might make it look like a strong sell right now compared to the Communications industry in China, where around half of the companies have P/S ratios below 4.3x and even P/S below 2x are quite common. 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 Advanced Fiber Resources (Zhuhai)

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

While the industry has experienced revenue growth lately, Advanced Fiber Resources (Zhuhai)'s revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Advanced Fiber Resources (Zhuhai) will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Advanced Fiber Resources (Zhuhai) would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow revenue by an impressive 47% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Looking ahead now, revenue is anticipated to climb by 33% during the coming year according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 48%, which is noticeably more attractive.

With this information, we find it concerning that Advanced Fiber Resources (Zhuhai) is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Advanced Fiber Resources (Zhuhai)'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.

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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Advanced Fiber Resources (Zhuhai) (2 are concerning) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.