Some Confidence Is Lacking In Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) As Shares Slide 25%

Ningbo Shenglong Automotive Powertrain System Co.,Ltd. (SHSE:603178) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 58% share price decline.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Ningbo Shenglong Automotive Powertrain SystemLtd's P/S ratio of 2.6x, since the median price-to-sales (or "P/S") ratio for the Auto Components industry in China is also close to 2.2x. 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 Ningbo Shenglong Automotive Powertrain SystemLtd

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

The recent revenue growth at Ningbo Shenglong Automotive Powertrain SystemLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to the broader industry in the near future. Those who are bullish on Ningbo Shenglong Automotive Powertrain SystemLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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.

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

The only time you'd be comfortable seeing a P/S like Ningbo Shenglong Automotive Powertrain SystemLtd's is when the company's growth is tracking the industry closely.

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. So we can start by confirming that the company has actually done a good 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 momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Ningbo Shenglong Automotive Powertrain SystemLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Ningbo Shenglong Automotive Powertrain SystemLtd's P/S

Ningbo Shenglong Automotive Powertrain SystemLtd's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Ningbo Shenglong Automotive Powertrain SystemLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 2 warning signs for Ningbo Shenglong Automotive Powertrain SystemLtd that you should be aware of.

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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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.