Raytech Holding Limited (NASDAQ:RAY) shares have had a really impressive month, gaining 150% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

After such a large jump in price, when almost half of the companies in the United States' Retail Distributors industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Raytech Holding as a stock not worth researching with its 11.4x 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.

What Does Raytech Holding's Recent Performance Look Like?

The revenue growth achieved at Raytech Holding over the last year would be more than acceptable for most companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

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

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. Pleasingly, revenue has also lifted 75% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 2.7% shows it's noticeably more attractive.

With this in consideration, it's not hard to understand why Raytech Holding's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Raytech Holding's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Raytech Holding maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Raytech Holding is showing 2 warning signs in our investment analysis, you should know about.

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).

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.