It's not a stretch to say that Xiangyang Automobile Bearing Co., Ltd.'s (SZSE:000678) price-to-sales (or "P/S") ratio of 2.1x right now seems quite "middle-of-the-road" for companies in the Auto Components industry in China, where the median P/S ratio is around 2.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Check out our latest analysis for Xiangyang Automobile Bearing bearing types
For example, consider that Xiangyang Automobile Bearing's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.
The only time you'd be comfortable seeing a P/S like Xiangyang Automobile Bearing's is when the company's growth is tracking the industry closely.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.4%. The last three years don't look nice either as the company has shrunk revenue by 9.0% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
In contrast to the company, the rest of the industry is expected to grow by 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this in mind, we find it worrying that Xiangyang Automobile Bearing's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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.
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.
The fact that Xiangyang Automobile Bearing currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It is also worth noting that we have found 2 warning signs for Xiangyang Automobile Bearing (1 makes us a bit uncomfortable!) that you need to take into consideration.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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Researches, develops, manufactures, and sells automobile bearings in China.
Excellent balance sheet and good value.
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