Changchun Engley Automobile Industry Co.,Ltd.'s (SHSE:601279) price-to-sales (or "P/S") ratio of 1.4x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Auto Components industry in China have P/S ratios greater than 2.4x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Has Changchun Engley Automobile IndustryLtd Performed Recently?

For example, consider that Changchun Engley Automobile IndustryLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Changchun Engley Automobile IndustryLtd's Revenue Growth Trending?

Changchun Engley Automobile IndustryLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 11%. As a result, revenue from three years ago have also fallen 2.3% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Changchun Engley Automobile IndustryLtd's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Changchun Engley Automobile IndustryLtd's P/S Mean For Investors?

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 we suspected, our examination of Changchun Engley Automobile IndustryLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Changchun Engley Automobile IndustryLtd (1 is a bit concerning!) that you should be aware of before investing here.

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

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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.