Xingmin Intelligent Transportation Systems (Group) Co., Ltd.'s (SZSE:002355) Share Price Not Quite Adding Up

When close to half the companies in the Auto Components industry in China have price-to-sales ratios (or "P/S") below 2.1x, you may consider Xingmin Intelligent Transportation Systems (Group) Co., Ltd. (SZSE:002355) as a stock to potentially avoid with its 3.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Xingmin Intelligent Transportation Systems (Group)

What Does Xingmin Intelligent Transportation Systems (Group)'s Recent Performance Look Like?

Xingmin Intelligent Transportation Systems (Group) has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Xingmin Intelligent Transportation Systems (Group), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Xingmin Intelligent Transportation Systems (Group)?

The only time you'd be truly comfortable seeing a P/S as high as Xingmin Intelligent Transportation Systems (Group)'s is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.0% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 49% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Xingmin Intelligent Transportation Systems (Group)'s P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Xingmin Intelligent Transportation Systems (Group) currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Xingmin Intelligent Transportation Systems (Group) (1 is significant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com