Shanghai Zhenhua Heavy Industries Co., Ltd.'s (SHSE:900947) price-to-sales (or "P/S") ratio of 0.3x might make it look like a strong buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 3.3x and even P/S above 6x are quite common. 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.

View our latest analysis for Shanghai Zhenhua Heavy Industries

How Shanghai Zhenhua Heavy Industries Has Been Performing

Revenue has risen firmly for Shanghai Zhenhua Heavy Industries recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. 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, Shanghai Zhenhua Heavy Industries would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Pleasingly, revenue has also lifted 32% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

This is in contrast to the rest of the industry, which is expected to grow by 38% 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 Shanghai Zhenhua Heavy Industries' 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 Final Word

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.

Our examination of Shanghai Zhenhua Heavy Industries 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Shanghai Zhenhua Heavy Industries (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Shanghai Zhenhua Heavy Industries, 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.