Jiangsu NanFang Precision Co.,Ltd. (SZSE:002553) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 34% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Jiangsu NanFang PrecisionLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.9x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.6x. 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.

Check out our latest analysis for Jiangsu NanFang PrecisionLtd

How Has Jiangsu NanFang PrecisionLtd Performed Recently?

Revenue has risen firmly for Jiangsu NanFang PrecisionLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Jiangsu NanFang PrecisionLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Jiangsu NanFang PrecisionLtd'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 10%. Pleasingly, revenue has also lifted 52% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

This is in contrast to the rest of the industry, which is expected to grow by 28% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Jiangsu NanFang PrecisionLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

Jiangsu NanFang PrecisionLtd's shares may have suffered, but its P/S remains high. 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.

The fact that Jiangsu NanFang PrecisionLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Jiangsu NanFang PrecisionLtd that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.