Zhejiang FORE Intelligent Technology Co.,Ltd's (SZSE:301368) price-to-sales (or "P/S") ratio of 13x may look like a poor investment opportunity when you consider close to half the companies in the Machinery industry in China have P/S ratios below 3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Zhejiang FORE Intelligent TechnologyLtd

What Does Zhejiang FORE Intelligent TechnologyLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Zhejiang FORE Intelligent TechnologyLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Zhejiang FORE Intelligent TechnologyLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 22%. Regardless, revenue has managed to lift by a handy 5.2% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 34% shows it's noticeably less attractive.

With this in mind, we find it worrying that Zhejiang FORE Intelligent TechnologyLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Zhejiang FORE Intelligent TechnologyLtd's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Zhejiang FORE Intelligent TechnologyLtd 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Zhejiang FORE Intelligent TechnologyLtd (of which 3 don't sit too well with us!) you should know about.

If you're unsure about the strength of Zhejiang FORE Intelligent TechnologyLtd's 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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