Miracle Automation Engineering Co.Ltd's (SZSE:002009) price-to-sales (or "P/S") ratio of 2.3x might make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 3.5x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Miracle Automation EngineeringLtd Has Been Performing

Miracle Automation EngineeringLtd hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

How Is Miracle Automation EngineeringLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Miracle Automation EngineeringLtd would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 23% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 110% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 23% growth forecast for the broader industry.

In light of this, it's peculiar that Miracle Automation EngineeringLtd's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What Does Miracle Automation EngineeringLtd's P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

To us, it seems Miracle Automation EngineeringLtd currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Having said that, be aware Miracle Automation EngineeringLtd is showing 1 warning sign in our investment analysis, you should know about.

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.