Despite an already strong run, Harbin Dongan Auto Engine Co.,Ltd (SHSE:600178) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 50%.

In spite of the firm bounce in price, considering around half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") above 2.2x, you may still consider Harbin Dongan Auto EngineLtd 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 Harbin Dongan Auto EngineLtd Performed Recently?

Harbin Dongan Auto EngineLtd 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. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Do Revenue Forecasts Match The Low P/S Ratio?

Harbin Dongan Auto EngineLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 7.7% decrease to the company's top line. As a result, revenue from three years ago have also fallen 32% overall. 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 34% as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 24% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Harbin Dongan Auto EngineLtd's P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Harbin Dongan Auto EngineLtd's P/S?

The latest share price surge wasn't enough to lift Harbin Dongan Auto EngineLtd's P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

To us, it seems Harbin Dongan Auto EngineLtd currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant 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.

Before you take the next step, you should know about the 1 warning sign for Harbin Dongan Auto EngineLtd that we have uncovered.

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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