You may think that with a price-to-sales (or "P/S") ratio of 1.8x China Transinfo Technology Co., Ltd (SZSE:002373) is a stock worth checking out, seeing as almost half of all the IT companies in China have P/S ratios greater than 3.5x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does China Transinfo Technology's P/S Mean For Shareholders?

There hasn't been much to differentiate China Transinfo Technology's and the industry's revenue growth lately. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. Those who are bullish on China Transinfo Technology will be hoping that this isn't the case.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, China Transinfo Technology would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.5% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 18% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 21% over the next year. Meanwhile, the rest of the industry is forecast to expand by 43%, which is noticeably more attractive.

In light of this, it's understandable that China Transinfo Technology's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does China Transinfo Technology's P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that China Transinfo Technology maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for China Transinfo Technology with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on China Transinfo Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.