When you see that almost half of the companies in the Auto industry in China have price-to-sales ratios (or "P/S") below 1.8x, Linhai Co.,Ltd. (SHSE:600099) looks to be giving off some sell signals with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
SHSE:600099 Price to Sales Ratio vs Industry July 30th 2024
How Has LinhaiLtd Performed Recently?
For example, consider that LinhaiLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on LinhaiLtd will help you shine a light on its historical performance.
Is There Enough Revenue Growth Forecasted For LinhaiLtd?
The only time you'd be truly comfortable seeing a P/S as high as LinhaiLtd's is when the company's growth is on track to outshine the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.4%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 51% shows it's noticeably less attractive.
With this information, we find it concerning that LinhaiLtd 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 Final Word
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
The fact that LinhaiLtd 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.
Before you settle on your opinion, we've discovered 1 warning sign for LinhaiLtd 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com