When close to half the companies operating in the Auto Components industry in China have price-to-sales ratios (or "P/S") above 2.4x, you may consider Changchun Engley Automobile Industry Co.,Ltd. (SHSE:601279) as an attractive investment with its 1.6x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Changchun Engley Automobile IndustryLtd's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Changchun Engley Automobile IndustryLtd, which is generally not a bad outcome. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

How Is Changchun Engley Automobile IndustryLtd's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Changchun Engley Automobile IndustryLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 4.4% gain to the company's revenues. The latest three year period has also seen a 5.9% overall rise in revenue, aided somewhat by its short-term performance. 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 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Changchun Engley Automobile IndustryLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Changchun Engley Automobile IndustryLtd's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Changchun Engley Automobile IndustryLtd 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Changchun Engley Automobile IndustryLtd (1 makes us a bit uncomfortable!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.