You may think that with a price-to-sales (or "P/S") ratio of 0.3x Xiamen King Long Motor Group Co., Ltd. (SHSE:600686) is definitely a stock worth checking out, seeing as almost half of all the Machinery companies in China have P/S ratios greater than 2.5x and even P/S above 5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Xiamen King Long Motor Group Has Been Performing

Xiamen King Long Motor Group has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Xiamen King Long Motor Group?

Xiamen King Long Motor Group's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 3.0%. This was backed up an excellent period prior to see revenue up by 34% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Xiamen King Long Motor Group is trading at a P/S lower than the industry. 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 Bottom Line On Xiamen King Long Motor Group's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Xiamen King Long Motor Group 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.

Having said that, be aware Xiamen King Long Motor Group is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

If these risks are making you reconsider your opinion on Xiamen King Long Motor Group, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com