With a price-to-sales (or "P/S") ratio of 2.4x Hefei Metalforming Intelligent Manufacturing Co., Ltd. (SHSE:603011) may be sending bullish signals at the moment, given that almost half of all the Machinery companies in China have P/S ratios greater than 3.2x and even P/S higher than 6x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Hefei Metalforming Intelligent Manufacturing

What Does Hefei Metalforming Intelligent Manufacturing's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Hefei Metalforming Intelligent Manufacturing, which is generally not a bad outcome. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Hefei Metalforming Intelligent Manufacturing will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Hefei Metalforming Intelligent Manufacturing?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Hefei Metalforming Intelligent Manufacturing's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 4.1%. The latest three year period has also seen an excellent 137% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

It's interesting to note that the rest of the industry is similarly expected to grow by 31% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this in consideration, we find it intriguing that Hefei Metalforming Intelligent Manufacturing's P/S falls short of its industry peers. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Hefei Metalforming Intelligent Manufacturing currently trades at a low P/S relative to the industry is unexpected considering its recent three-year growth is in line with the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching the company's performance. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hefei Metalforming Intelligent Manufacturing you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.