Ningbo Fangzheng Automobile Mould Co.,Ltd. (SZSE:300998) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

Ningbo Fangzheng Automobile Mould Co.,Ltd. (SZSE:300998) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Ningbo Fangzheng Automobile MouldLtd's P/S ratio of 2.4x, since the median price-to-sales (or "P/S") ratio for the Auto Components industry in China is also close to 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Ningbo Fangzheng Automobile MouldLtd

What Does Ningbo Fangzheng Automobile MouldLtd's P/S Mean For Shareholders?

The revenue growth achieved at Ningbo Fangzheng Automobile MouldLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 Ningbo Fangzheng Automobile MouldLtd's earnings, revenue and cash flow.

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

The only time you'd be comfortable seeing a P/S like Ningbo Fangzheng Automobile MouldLtd's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The strong recent performance means it was also able to grow revenue by 41% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Ningbo Fangzheng Automobile MouldLtd 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. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Ningbo Fangzheng Automobile MouldLtd's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Ningbo Fangzheng Automobile MouldLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

You should always think about risks. Case in point, we've spotted 2 warning signs for Ningbo Fangzheng Automobile MouldLtd 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.