When you see that almost half of the companies in the Luxury industry in China have price-to-sales ratios (or "P/S") below 1.6x, Jiangsu Hongdou Industrial Co.,LTD (SHSE:600400) looks to be giving off some sell signals with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Jiangsu Hongdou IndustrialLTD's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Jiangsu Hongdou IndustrialLTD has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Jiangsu Hongdou IndustrialLTD?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Jiangsu Hongdou IndustrialLTD's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. This isn't what shareholders were looking for as it means they've been left with a 1.8% decline in revenue over the last three years in total. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 27% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 15%, which is noticeably less attractive.

With this information, we can see why Jiangsu Hongdou IndustrialLTD is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

We've established that Jiangsu Hongdou IndustrialLTD maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Luxury industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Jiangsu Hongdou IndustrialLTD is showing 1 warning sign in our investment analysis, you should know about.

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.