Yangtze Optical Electronic Co., Ltd. (SHSE:688143) shares have had a really impressive month, gaining 37% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 55%.

After such a large jump in price, when almost half of the companies in China's Communications industry have price-to-sales ratios (or "P/S") below 5.6x, you may consider Yangtze Optical Electronic as a stock not worth researching with its 13.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Yangtze Optical Electronic's P/S Mean For Shareholders?

Yangtze Optical Electronic could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Yangtze Optical Electronic's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Yangtze Optical Electronic's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 101% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 34%, which is noticeably less attractive.

In light of this, it's understandable that Yangtze Optical Electronic'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 Final Word

Shares in Yangtze Optical Electronic have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Yangtze Optical Electronic maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Yangtze Optical Electronic (2 are concerning) you should be aware of.

If these risks are making you reconsider your opinion on Yangtze Optical Electronic, 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.