It's not a stretch to say that Zhejiang Yongtai Technology Co.,Ltd.'s (SZSE:002326) price-to-sales (or "P/S") ratio of 2.3x seems quite "middle-of-the-road" for Chemicals companies in China, seeing as it matches the P/S ratio of the wider industry. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Zhejiang Yongtai TechnologyLtd

How Has Zhejiang Yongtai TechnologyLtd Performed Recently?

As an illustration, revenue has deteriorated at Zhejiang Yongtai TechnologyLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Is There Some Revenue Growth Forecasted For Zhejiang Yongtai TechnologyLtd?

Zhejiang Yongtai TechnologyLtd's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's top line. Still, the latest three year period has seen an excellent 41% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

This is in contrast to the rest of the industry, which is expected to grow by 29% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Zhejiang Yongtai TechnologyLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

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.

We've established that Zhejiang Yongtai TechnologyLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Zhejiang Yongtai TechnologyLtd (3 are concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.