There wouldn't be many who think Shanghai Datun Energy Resources Co., Ltd.'s (SHSE:600508) price-to-sales (or "P/S") ratio of 1.1x is worth a mention when the median P/S for the Oil and Gas industry in China is similar at about 1.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Shanghai Datun Energy Resources' Recent Performance Look Like?

Recent times haven't been great for Shanghai Datun Energy Resources as its revenue has been falling quicker than most other companies. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

How Is Shanghai Datun Energy Resources' Revenue Growth Trending?

In order to justify its P/S ratio, Shanghai Datun Energy Resources would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 28% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 9.7% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 6.3%, which is noticeably less attractive.

With this information, we find it interesting that Shanghai Datun Energy Resources is trading at a fairly similar P/S compared to the industry. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Shanghai Datun Energy Resources' P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Looking at Shanghai Datun Energy Resources' analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Shanghai Datun Energy Resources that you should be aware of.

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.