With a price-to-sales (or "P/S") ratio of 2.3x Brilliance Technology Co., Ltd. (SZSE:300542) may be sending bullish signals at the moment, given that almost half of all the IT companies in China have P/S ratios greater than 4.1x and even P/S higher than 7x are not unusual. 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 Brilliance Technology

How Brilliance Technology Has Been Performing

With revenue growth that's superior to most other companies of late, Brilliance Technology has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. 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.

How Is Brilliance Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Brilliance Technology'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 13%. Revenue has also lifted 30% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 29% during the coming year according to the sole analyst following the company. With the industry predicted to deliver 47% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Brilliance Technology is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As expected, our analysis of Brilliance Technology's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you settle on your opinion, we've discovered 2 warning signs for Brilliance Technology that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.