Shanghai Industrial Development Co.,Ltd's (SHSE:600748) price-to-sales (or "P/S") ratio of 0.8x might make it look like a buy right now compared to the Real Estate industry in China, where around half of the companies have P/S ratios above 1.5x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Shanghai Industrial DevelopmentLtd
How Shanghai Industrial DevelopmentLtd Has Been Performing
Shanghai Industrial DevelopmentLtd has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
Although there are no analyst estimates available for Shanghai Industrial DevelopmentLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Shanghai Industrial DevelopmentLtd's Revenue Growth Trending?
The only time you'd be truly comfortable seeing a P/S as low as Shanghai Industrial DevelopmentLtd's is when the company's growth is on track to lag the industry.
If we review the last year of revenue growth, the company posted a worthy increase of 11%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 4.6% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.
With this in mind, we understand why Shanghai Industrial DevelopmentLtd's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
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.
Our examination of Shanghai Industrial DevelopmentLtd confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Shanghai Industrial DevelopmentLtd (2 are a bit concerning!) that you should be aware of before investing here.
If these risks are making you reconsider your opinion on Shanghai Industrial DevelopmentLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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