It's not a stretch to say that Shanxi Coking Co., Ltd.'s (SHSE:600740) price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" for companies in the Metals and Mining industry in China, where the median P/S ratio is around 1.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Shanxi Coking Has Been Performing

Shanxi Coking could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Shanxi Coking's Revenue Growth Trending?

In order to justify its P/S ratio, Shanxi Coking would need to produce growth that's similar to the industry.

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 16%. The last three years don't look nice either as the company has shrunk revenue by 25% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.2% during the coming year according to the two analysts following the company. That's shaping up to be materially lower than the 15% growth forecast for the broader industry.

In light of this, it's curious that Shanxi Coking's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look at the analysts forecasts of Shanxi Coking's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shanxi Coking (1 is a bit concerning) you should be aware of.

If you're unsure about the strength of Shanxi Coking's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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