Despite an already strong run, Shanghai Aerospace Automobile Electromechanical Co., Ltd. (SHSE:600151) shares have been powering on, with a gain of 33% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 13% over that time.

Even after such a large jump in price, considering around half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") above 1.9x, you may still consider Shanghai Aerospace Automobile Electromechanical as an solid investment opportunity with its 1.3x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Has Shanghai Aerospace Automobile Electromechanical Performed Recently?

For instance, Shanghai Aerospace Automobile Electromechanical's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

The only time you'd be truly comfortable seeing a P/S as low as Shanghai Aerospace Automobile Electromechanical's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 26%. Regardless, revenue has managed to lift by a handy 22% 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.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shanghai Aerospace Automobile Electromechanical is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Despite Shanghai Aerospace Automobile Electromechanical's share price climbing recently, its P/S still lags most other companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shanghai Aerospace Automobile Electromechanical 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. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Before you take the next step, you should know about the 1 warning sign for Shanghai Aerospace Automobile Electromechanical that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.