You may think that with a price-to-sales (or "P/S") ratio of 6.8x Hunan Boyun New Materials Co.,Ltd (SZSE:002297) is a stock worth checking out, seeing as almost half of all the Aerospace & Defense companies in China have P/S ratios greater than 9.3x and even P/S higher than 17x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Has Hunan Boyun New MaterialsLtd Performed Recently?

For instance, Hunan Boyun New MaterialsLtd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Hunan Boyun New MaterialsLtd would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 1.1% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 30% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 55% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Hunan Boyun New MaterialsLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Hunan Boyun New MaterialsLtd's P/S?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Hunan Boyun New MaterialsLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Hunan Boyun New MaterialsLtd with six simple checks on some of these key factors.

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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