You may think that with a price-to-sales (or "P/S") ratio of 2.5x AECC Aviation Power Co.,Ltd (SHSE:600893) is definitely a stock worth checking out, seeing as almost half of all the Aerospace & Defense companies in China have P/S ratios greater than 9x and even P/S above 16x 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 so limited.

How AECC Aviation PowerLtd Has Been Performing

AECC Aviation PowerLtd certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. It might be that many expect the strong revenue performance to degrade substantially, possibly more than the industry, which has repressed the P/S. Those who are bullish on AECC Aviation PowerLtd will be hoping that this isn't the case and the company continues to beat out the industry.

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like AECC Aviation PowerLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 5.8%. This was backed up an excellent period prior to see revenue up by 38% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 26% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 57% growth forecast for the broader industry.

With this information, we can see why AECC Aviation PowerLtd is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On AECC Aviation PowerLtd's P/S

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.

We've established that AECC Aviation PowerLtd maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for AECC Aviation PowerLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on AECC Aviation PowerLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.