With a price-to-sales (or "P/S") ratio of 0.9x Wuzhou Special Paper Group Co., Ltd. (SHSE:605007) may be sending bullish signals at the moment, given that almost half of all the Forestry companies in China have P/S ratios greater than 1.7x and even P/S higher than 4x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Wuzhou Special Paper Group's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Wuzhou Special Paper Group has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

In order to justify its P/S ratio, Wuzhou Special Paper Group would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. The strong recent performance means it was also able to grow revenue by 145% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 20% over the next year. That's shaping up to be materially higher than the 17% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Wuzhou Special Paper Group's P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Wuzhou Special Paper Group's P/S

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.

A look at Wuzhou Special Paper Group's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You need to take note of risks, for example - Wuzhou Special Paper Group has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're unsure about the strength of Wuzhou Special Paper Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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