Erayak Power Solution Group Inc. (NASDAQ:RAYA) shares have continued their recent momentum with a 45% gain in the last month alone. The last month tops off a massive increase of 257% in the last year.

Following the firm bounce in price, when almost half of the companies in the United States' Electrical industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Erayak Power Solution Group as a stock not worth researching with its 5.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Erayak Power Solution Group

How Erayak Power Solution Group Has Been Performing

Recent times have been quite advantageous for Erayak Power Solution Group as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Erayak Power Solution Group will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Erayak Power Solution Group?

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

Taking a look back first, we see that the company grew revenue by an impressive 49% last year. The latest three year period has also seen an excellent 63% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Erayak Power Solution Group is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to Erayak Power Solution Group's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Erayak Power Solution Group can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Erayak Power Solution Group (2 are a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Erayak Power Solution Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.