Subdued Growth No Barrier To Chongqing Zongshen Power Machinery Co.,Ltd's (SZSE:001696) Price

When you see that almost half of the companies in the Auto Components industry in China have price-to-sales ratios (or "P/S") below 2.6x, Chongqing Zongshen Power Machinery Co.,Ltd (SZSE:001696) looks to be giving off some sell signals 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.

See our latest analysis for Chongqing Zongshen Power MachineryLtd

How Chongqing Zongshen Power MachineryLtd Has Been Performing

Recent times have been advantageous for Chongqing Zongshen Power MachineryLtd as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Chongqing Zongshen Power MachineryLtd will help you uncover what's on the horizon.

How Is Chongqing Zongshen Power MachineryLtd's Revenue Growth Trending?

Chongqing Zongshen Power MachineryLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 16% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader industry.

With this information, we find it concerning that Chongqing Zongshen Power MachineryLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Chongqing Zongshen Power MachineryLtd'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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Chongqing Zongshen Power MachineryLtd, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Chongqing Zongshen Power MachineryLtd is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.