Linhai Co.,Ltd.'s (SHSE:600099) Business Is Yet to Catch Up With Its Share Price

It's not a stretch to say that Linhai Co.,Ltd.'s (SHSE:600099) price-to-sales (or "P/S") ratio of 2.2x right now seems quite "middle-of-the-road" for companies in the Auto industry in China, where the median P/S ratio is around 1.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for LinhaiLtd

What Does LinhaiLtd's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, LinhaiLtd has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think LinhaiLtd's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. The latest three year period has also seen a 27% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 1.1% over the next year. With the industry predicted to deliver 31% growth, that's a disappointing outcome.

With this information, we find it concerning that LinhaiLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On LinhaiLtd's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It appears that LinhaiLtd currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with LinhaiLtd, and understanding should be part of your investment process.

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.