IAT Automobile Technology Co., Ltd. (SZSE:300825) Shares Slammed 25% But Getting In Cheap Might Be Difficult Regardless

IAT Automobile Technology Co., Ltd. (SZSE:300825) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The recent drop has obliterated the annual return, with the share price now down 9.3% over that longer period.

Even after such a large drop in price, given around half the companies in China's Auto industry have price-to-sales ratios (or "P/S") below 1.8x, you may still consider IAT Automobile Technology as a stock to avoid entirely with its 6.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for IAT Automobile Technology

What Does IAT Automobile Technology's P/S Mean For Shareholders?

IAT Automobile Technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think IAT Automobile Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For IAT Automobile Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like IAT Automobile Technology's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 27% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 158% over the next year. That's shaping up to be materially higher than the 67% growth forecast for the broader industry.

With this information, we can see why IAT Automobile Technology is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does IAT Automobile Technology's P/S Mean For Investors?

Even after such a strong price drop, IAT Automobile Technology's P/S still exceeds the industry median significantly. 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.

We've established that IAT Automobile Technology maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Auto industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with IAT Automobile Technology, and understanding them should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.