Those holding NanJing AoLian AE&EA Co.,Ltd (SZSE:300585) shares would be relieved that the share price has rebounded 39% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

Following the firm bounce in price, you could be forgiven for thinking NanJing AoLian AE&EALtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.7x, considering almost half the companies in China's Auto Components industry have P/S ratios below 2.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does NanJing AoLian AE&EALtd's Recent Performance Look Like?

Revenue has risen firmly for NanJing AoLian AE&EALtd recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

The only time you'd be truly comfortable seeing a P/S as steep as NanJing AoLian AE&EALtd's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. Revenue has also lifted 12% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.

With this in mind, we find it worrying that NanJing AoLian AE&EALtd'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On NanJing AoLian AE&EALtd's P/S

The strong share price surge has lead to NanJing AoLian AE&EALtd's P/S soaring as well. 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 NanJing AoLian AE&EALtd 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You need to take note of risks, for example - NanJing AoLian AE&EALtd has 4 warning signs (and 1 which can't be ignored) we think you should know about.

If you're unsure about the strength of NanJing AoLian AE&EALtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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