Revenues Not Telling The Story For Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) After Shares Rise 28%

Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 35% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.8x, you may consider Ningbo Shenglong Automotive Powertrain SystemLtd as a stock probably not worth researching with its 3.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Ningbo Shenglong Automotive Powertrain SystemLtd

What Does Ningbo Shenglong Automotive Powertrain SystemLtd's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Ningbo Shenglong Automotive Powertrain SystemLtd, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ningbo Shenglong Automotive Powertrain SystemLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Ningbo Shenglong Automotive Powertrain SystemLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 6.1% gain to the company's revenues. The latest three year period has also seen a 8.2% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Ningbo Shenglong Automotive Powertrain SystemLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 recent growth rates.

The Final Word

Ningbo Shenglong Automotive Powertrain SystemLtd's P/S is on the rise since its shares have risen strongly. 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.

Our examination of Ningbo Shenglong Automotive Powertrain SystemLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Ningbo Shenglong Automotive Powertrain SystemLtd you should be aware of.

If you're unsure about the strength of Ningbo Shenglong Automotive Powertrain SystemLtd'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.