Unfortunately for some shareholders, the Zhejiang Jingu Company Limited (SZSE:002488) share price has dived 28% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.

Following the heavy fall in price, given about half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") above 2.1x, you may consider Zhejiang Jingu as an attractive investment with its 1.6x 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 limited.

How Has Zhejiang Jingu Performed Recently?

Revenue has risen at a steady rate over the last year for Zhejiang Jingu, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. Those who are bullish on Zhejiang Jingu will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Zhejiang Jingu?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Zhejiang Jingu's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 5.8%. The latest three year period has also seen a 27% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

In light of this, it's understandable that Zhejiang Jingu's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Zhejiang Jingu's recently weak share price has pulled its P/S back below other Auto Components companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

In line with expectations, Zhejiang Jingu maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Zhejiang Jingu is showing 6 warning signs in our investment analysis, and 4 of those are potentially serious.

If these risks are making you reconsider your opinion on Zhejiang Jingu, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.