With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Insurance industry in Hong Kong, you could be forgiven for feeling indifferent about ZhongAn Online P & C Insurance Co., Ltd.'s (HKG:6060) P/S ratio of 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does ZhongAn Online P & C Insurance's Recent Performance Look Like?

Recent times have been advantageous for ZhongAn Online P & C Insurance as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like ZhongAn Online P & C Insurance's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 60% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 17% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that ZhongAn Online P & C Insurance's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From ZhongAn Online P & C Insurance'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 look at the analysts forecasts of ZhongAn Online P & C Insurance's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

It is also worth noting that we have found 2 warning signs for ZhongAn Online P & C Insurance that you need to take into consideration.

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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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.