Chengdu Lihang Technology Co,Ltd. (SHSE:603261) shareholders would be excited to see that the share price has had a great month, posting a 128% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 30%.

Since its price has surged higher, Chengdu Lihang Technology CoLtd's price-to-sales (or "P/S") ratio of 10.5x might make it look like a sell right now compared to the wider Aerospace & Defense industry in China, where around half of the companies have P/S ratios below 8.4x and even P/S below 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Has Chengdu Lihang Technology CoLtd Performed Recently?

The revenue growth achieved at Chengdu Lihang Technology CoLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Chengdu Lihang Technology CoLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Chengdu Lihang Technology CoLtd?

In order to justify its P/S ratio, Chengdu Lihang Technology CoLtd would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Revenue has also lifted 24% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Chengdu Lihang Technology CoLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Chengdu Lihang Technology CoLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that Chengdu Lihang Technology CoLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 4 warning signs we've spotted with Chengdu Lihang Technology CoLtd (including 3 which shouldn't be ignored).

If these risks are making you reconsider your opinion on Chengdu Lihang Technology CoLtd, 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.