With a price-to-sales (or "P/S") ratio of 2.2x Ganzhou Yihao New Materials Co., Ltd. (SZSE:301176) may be sending bullish signals at the moment, given that almost half of all the Electronic companies in China have P/S ratios greater than 4.3x and even P/S higher than 9x 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 Ganzhou Yihao New Materials' Recent Performance Look Like?

Ganzhou Yihao New Materials has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Ganzhou Yihao New Materials will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

Ganzhou Yihao New Materials' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.6% last year. Revenue has also lifted 6.5% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Ganzhou Yihao New Materials' P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Ganzhou Yihao New Materials' 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.

Our examination of Ganzhou Yihao New Materials confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Ganzhou Yihao New Materials that you should be aware of.

If you're unsure about the strength of Ganzhou Yihao New Materials' 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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