Revenues Not Telling The Story For Huaiji Dengyun Auto-parts (Holding) Co.,Ltd. (SZSE:002715)

When close to half the companies in the Auto Components industry in China have price-to-sales ratios (or "P/S") below 2.3x, you may consider Huaiji Dengyun Auto-parts (Holding) Co.,Ltd. (SZSE:002715) as a stock to potentially avoid with its 2.9x 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.

See our latest analysis for Huaiji Dengyun Auto-parts (Holding)Ltd

How Has Huaiji Dengyun Auto-parts (Holding)Ltd Performed Recently?

Revenue has risen firmly for Huaiji Dengyun Auto-parts (Holding)Ltd recently, which is pleasing to see. 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. 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 Huaiji Dengyun Auto-parts (Holding)Ltd's earnings, revenue and cash flow.

How Is Huaiji Dengyun Auto-parts (Holding)Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, Huaiji Dengyun Auto-parts (Holding)Ltd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.4% last year. This was backed up an excellent period prior to see revenue up by 52% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 26% shows it's noticeably less attractive.

In light of this, it's alarming that Huaiji Dengyun Auto-parts (Holding)Ltd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Huaiji Dengyun Auto-parts (Holding)Ltd's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Huaiji Dengyun Auto-parts (Holding)Ltd 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 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Huaiji Dengyun Auto-parts (Holding)Ltd (1 shouldn't be ignored!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Huaiji Dengyun Auto-parts (Holding)Ltd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.