Shenzhen Aoni Electronic Co., Ltd.'s (SZSE:301189) price-to-sales (or "P/S") ratio of 4.8x may look like a poor investment opportunity when you consider close to half the companies in the Consumer Durables industry in China have P/S ratios below 1.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Shenzhen Aoni Electronic

What Does Shenzhen Aoni Electronic's P/S Mean For Shareholders?

For example, consider that Shenzhen Aoni Electronic's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Shenzhen Aoni Electronic?

In order to justify its P/S ratio, Shenzhen Aoni Electronic would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 49% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this information, we find it concerning that Shenzhen Aoni Electronic is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Shenzhen Aoni Electronic'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.

Our examination of Shenzhen Aoni Electronic revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 4 warning signs for Shenzhen Aoni Electronic (3 are concerning!) that we have uncovered.

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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