With a price-to-sales (or "P/S") ratio of 2x Anhui Tatfook Technology Co., Ltd (SZSE:300134) may be sending bullish signals at the moment, given that almost half of all the Communications companies in China have P/S ratios greater than 3.9x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Anhui Tatfook Technology's P/S Mean For Shareholders?

For example, consider that Anhui Tatfook Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Anhui Tatfook Technology will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

How Is Anhui Tatfook Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Anhui Tatfook Technology's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 3.7% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 12% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that to the industry, which is predicted to deliver 45% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's understandable that Anhui Tatfook Technology's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Anhui Tatfook Technology's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Anhui Tatfook Technology confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Anhui Tatfook Technology you should know about.

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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