Jiangxi Hongdu Aviation Industry Co., Ltd. (SHSE:600316) Surges 36% Yet Its Low P/S Is No Reason For Excitement

Jiangxi Hongdu Aviation Industry Co., Ltd. (SHSE:600316) shares have continued their recent momentum with a 36% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 44%.

Although its price has surged higher, Jiangxi Hongdu Aviation Industry may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 6x, since almost half of all companies in the Aerospace & Defense industry in China have P/S ratios greater than 7.7x and even P/S higher than 14x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangxi Hongdu Aviation Industry

What Does Jiangxi Hongdu Aviation Industry's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Jiangxi Hongdu Aviation Industry over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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 out of 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 Jiangxi Hongdu Aviation Industry's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Jiangxi Hongdu Aviation Industry's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 51% decrease to the company's top line. As a result, revenue from three years ago have also fallen 39% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 40% shows it's an unpleasant look.

In light of this, it's understandable that Jiangxi Hongdu Aviation Industry's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What Does Jiangxi Hongdu Aviation Industry's P/S Mean For Investors?

Jiangxi Hongdu Aviation Industry's stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Jiangxi Hongdu Aviation Industry maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Jiangxi Hongdu Aviation Industry has 4 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.