Sichuan Chengfei Integration Technology Corp.Ltd (SZSE:002190) shareholders have had their patience rewarded with a 107% share price jump in the last month. The last month tops off a massive increase of 108% in the last year.

Following the firm bounce in price, given around half the companies in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Sichuan Chengfei Integration TechnologyLtd as a stock to avoid entirely with its 4.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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What Does Sichuan Chengfei Integration TechnologyLtd's Recent Performance Look Like?

Sichuan Chengfei Integration TechnologyLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the reasonable 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.

Is There Enough Revenue Growth Forecasted For Sichuan Chengfei Integration TechnologyLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Chengfei Integration TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.1% last year. The latest three year period has also seen an excellent 75% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Sichuan Chengfei Integration TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Sichuan Chengfei Integration TechnologyLtd's P/S?

Shares in Sichuan Chengfei Integration TechnologyLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Sichuan Chengfei Integration TechnologyLtd 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. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 2 warning signs for Sichuan Chengfei Integration TechnologyLtd (1 doesn't sit too well with us!) that we have uncovered.

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.