Some Confidence Is Lacking In Advanced Fiber Resources (Zhuhai), Ltd.'s (SZSE:300620) P/S

With a price-to-sales (or "P/S") ratio of 13.3x Advanced Fiber Resources (Zhuhai), Ltd. (SZSE:300620) may be sending very bearish signals at the moment, given that almost half of all the Communications companies in China have P/S ratios under 6.1x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Advanced Fiber Resources (Zhuhai)

How Advanced Fiber Resources (Zhuhai) Has Been Performing

Recent times have been advantageous for Advanced Fiber Resources (Zhuhai) as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Advanced Fiber Resources (Zhuhai).

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.

Retrospectively, the last year delivered an exceptional 37% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 46% in total over the last three years. 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 year should generate growth of 25% as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 32% growth forecast for the broader industry.

With this information, we find it concerning that Advanced Fiber Resources (Zhuhai) is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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?

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. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Advanced Fiber Resources (Zhuhai) has 3 warning signs we think you should be aware of.

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.