With a price-to-sales (or "P/S") ratio of 0.4x Tongkun Group Co., Ltd. (SHSE:601233) may be sending bullish signals at the moment, given that almost half of all the Chemicals companies in China have P/S ratios greater than 1.7x and even P/S higher than 4x are not unusual. 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 Tongkun Group Has Been Performing

Recent times have been advantageous for Tongkun Group as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

How Is Tongkun Group's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. The latest three year period has also seen an excellent 78% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 7.2% during the coming year according to the eleven analysts following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader industry.

With this in consideration, its clear as to why Tongkun Group's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As expected, our analysis of Tongkun Group's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Tongkun Group (1 doesn't sit too well with us!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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