Zhejiang Yueling Co., Ltd. (SZSE:002725) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 23% in that time.
In spite of the heavy fall in price, given close to half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Zhejiang Yueling as a stock to potentially avoid with its 3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
How Zhejiang Yueling Has Been Performing
For instance, Zhejiang Yueling's receding revenue in recent times would have to be some food for thought. 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.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Yueling will help you shine a light on its historical performance.
Do Revenue Forecasts Match The High P/S Ratio?
Zhejiang Yueling's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.
This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this in mind, we find it worrying that Zhejiang Yueling'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.
The Bottom Line On Zhejiang Yueling's P/S
There's still some elevation in Zhejiang Yueling's P/S, even if the same can't be said for its share price recently. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
The fact that Zhejiang Yueling 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.
You always need to take note of risks, for example - Zhejiang Yueling has 2 warning signs we think you should be aware of.
If you're unsure about the strength of Zhejiang Yueling'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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