When you see that almost half of the companies in the Electrical industry in China have price-to-sales ratios (or "P/S") above 2.2x, Hunan Changyuan Lico Co.,Ltd. (SHSE:688779) looks to be giving off some buy signals with its 1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Has Hunan Changyuan LicoLtd Performed Recently?

While the industry has experienced revenue growth lately, Hunan Changyuan LicoLtd's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

How Is Hunan Changyuan LicoLtd's Revenue Growth Trending?

Hunan Changyuan LicoLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 40%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Therefore, it's fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.

Turning to the outlook, the next year should generate growth of 43% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 27% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Hunan Changyuan LicoLtd's P/S sits behind most of its industry peers. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Hunan Changyuan LicoLtd's P/S

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.

Hunan Changyuan LicoLtd's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hunan Changyuan LicoLtd you should be aware of.

If you're unsure about the strength of Hunan Changyuan LicoLtd'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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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.