You may think that with a price-to-sales (or "P/S") ratio of 2.5x Shenzhen Sunline Tech Co., Ltd. (SZSE:300348) is a stock worth checking out, seeing as almost half of all the IT companies in China have P/S ratios greater than 3.2x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Shenzhen Sunline Tech's P/S Mean For Shareholders?

Shenzhen Sunline Tech could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For Shenzhen Sunline Tech?

In order to justify its P/S ratio, Shenzhen Sunline Tech would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 24% overall rise in revenue. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 20% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 20% each year, which is not materially different.

With this information, we find it odd that Shenzhen Sunline Tech is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can achieve future growth expectations.

What Does Shenzhen Sunline Tech's P/S Mean For Investors?

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 looks to us like the P/S figures for Shenzhen Sunline Tech remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Shenzhen Sunline Tech with six simple checks on some of these key factors.

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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