When close to half the companies in the Chemicals industry in China have price-to-sales ratios (or "P/S") below 2.2x, you may consider Fujian Kuncai Material Technology Co., Ltd. (SHSE:603826) as a stock to avoid entirely with its 24.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Fujian Kuncai Material Technology Has Been Performing

Fujian Kuncai Material Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Fujian Kuncai Material Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Fujian Kuncai Material Technology's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.8%. Regardless, revenue has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 325% as estimated by the one analyst watching the company. With the industry only predicted to deliver 21%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Fujian Kuncai Material 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.

The Bottom Line On Fujian Kuncai Material Technology's P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Fujian Kuncai Material Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Fujian Kuncai Material Technology (at least 1 which can't be ignored), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Fujian Kuncai Material 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.