Tofflon Science and Technology Group Co., Ltd.'s (SZSE:300171) price-to-sales (or "P/S") ratio of 2x might make it look like a strong buy right now compared to the Medical Equipment industry in China, where around half of the companies have P/S ratios above 5.8x and even P/S above 9x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does Tofflon Science and Technology Group's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Tofflon Science and Technology Group's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still 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?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Tofflon Science and Technology Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. Regardless, revenue has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 5.8% over the next year. That's shaping up to be materially lower than the 25% growth forecast for the broader industry.

In light of this, it's understandable that Tofflon Science and Technology Group'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.

The Key Takeaway

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.

We've established that Tofflon Science and Technology Group 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. The company will need a change of fortune to justify the P/S rising higher in the future.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Tofflon Science and Technology Group (of which 1 is a bit concerning!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.