Shenyang Machine Tool Co., Ltd.'s (SZSE:000410) price-to-sales (or "P/S") ratio of 8.6x may look like a poor investment opportunity when you consider close to half the companies in the Machinery industry in China have P/S ratios below 2.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
SZSE:000410 Price to Sales Ratio vs Industry July 22nd 2024
What Does Shenyang Machine Tool's Recent Performance Look Like?
As an illustration, revenue has deteriorated at Shenyang Machine Tool over the last year, which is not ideal at all. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shenyang Machine Tool's earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenyang Machine Tool's to be considered reasonable.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.8%. The last three years don't look nice either as the company has shrunk revenue by 2.7% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this in mind, we find it worrying that Shenyang Machine Tool's P/S exceeds that of its industry peers. 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 Shenyang Machine Tool'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.
We've established that Shenyang Machine Tool currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.
Plus, you should also learn about these 2 warning signs we've spotted with Shenyang Machine Tool (including 1 which is potentially serious).
If these risks are making you reconsider your opinion on Shenyang Machine Tool, explore our interactive list of high quality stocks to get an idea of what else is out there.
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