Chongqing Fenghwa Group Co., Ltd.'s (SHSE:600615) Earnings Haven't Escaped The Attention Of Investors

Chongqing Fenghwa Group Co., Ltd.'s (SHSE:600615) price-to-sales (or "P/S") ratio of 11.4x may look like a poor investment opportunity when you consider close to half the companies in the Auto Components industry in China have P/S ratios below 2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Chongqing Fenghwa Group

What Does Chongqing Fenghwa Group's P/S Mean For Shareholders?

Revenue has risen firmly for Chongqing Fenghwa Group recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Chongqing Fenghwa Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Chongqing Fenghwa Group?

The only time you'd be truly comfortable seeing a P/S as steep as Chongqing Fenghwa Group's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. The latest three year period has also seen an excellent 114% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 23%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's understandable that Chongqing Fenghwa Group's P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What We Can Learn From Chongqing Fenghwa Group's P/S?

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.

We've established that Chongqing Fenghwa Group maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Chongqing Fenghwa Group (at least 1 which is potentially serious), and understanding these should be part of your investment process.

If you're unsure about the strength of Chongqing Fenghwa Group'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.