When you see that almost half of the companies in the Machinery industry in China have price-to-sales ratios (or "P/S") below 2.6x, AA Industrial Belting (Shanghai) Co.,Ltd (SHSE:603580) looks to be giving off strong sell signals with its 14.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How AA Industrial Belting (Shanghai)Ltd Has Been Performing

Revenue has risen at a steady rate over the last year for AA Industrial Belting (Shanghai)Ltd, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is AA Industrial Belting (Shanghai)Ltd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like AA Industrial Belting (Shanghai)Ltd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.1% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 29% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this in mind, we find it worrying that AA Industrial Belting (Shanghai)Ltd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does AA Industrial Belting (Shanghai)Ltd's P/S Mean For Investors?

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.

We've established that AA Industrial Belting (Shanghai)Ltd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you settle on your opinion, we've discovered 2 warning signs for AA Industrial Belting (Shanghai)Ltd (1 is a bit unpleasant!) that you should be aware of.

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.