When you see that almost half of the companies in the Machinery industry in China have price-to-sales ratios (or "P/S") above 2.2x, Zhejiang RIFA Precision Machinery Co., Ltd. (SZSE:002520) looks to be giving off some buy signals with its 1.5x 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 Zhejiang RIFA Precision Machinery's Recent Performance Look Like?

Zhejiang RIFA Precision Machinery has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Zhejiang RIFA Precision Machinery will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Zhejiang RIFA Precision Machinery?

In order to justify its P/S ratio, Zhejiang RIFA Precision Machinery would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. The solid recent performance means it was also able to grow revenue by 13% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why Zhejiang RIFA Precision Machinery's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

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.

In line with expectations, Zhejiang RIFA Precision Machinery maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It is also worth noting that we have found 1 warning sign for Zhejiang RIFA Precision Machinery that you need to take into consideration.

If you're unsure about the strength of Zhejiang RIFA Precision Machinery'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.