When you see that almost half of the companies in the Auto industry in China have price-to-sales ratios (or "P/S") below 2.1x, IAT Automobile Technology Co., Ltd. (SZSE:300825) looks to be giving off strong sell signals with its 7.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for IAT Automobile Technology

How IAT Automobile Technology Has Been Performing

IAT Automobile Technology 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. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For IAT Automobile Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like IAT Automobile Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 21% 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 27% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 134% over the next year. With the industry only predicted to deliver 49%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that IAT Automobile Technology's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From IAT Automobile Technology's P/S?

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.

As we suspected, our examination of IAT Automobile Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - IAT Automobile Technology has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

If you're unsure about the strength of IAT Automobile Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.