China First Heavy Industries (SHSE:601106) Might Not Be As Mispriced As It Looks

China First Heavy Industries' (SHSE:601106) price-to-sales (or "P/S") ratio of 0.9x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Machinery industry in China have P/S ratios greater than 2.4x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for China First Heavy Industries

How China First Heavy Industries Has Been Performing

China First Heavy Industries 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 seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China First Heavy Industries.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like China First Heavy Industries' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 33%. This means it has also seen a slide in revenue over the longer-term as revenue is down 20% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 62% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 22% growth forecast for the broader industry.

With this in consideration, we find it intriguing that China First Heavy Industries' P/S sits behind most of its industry peers. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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.

A look at China First Heavy Industries' revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for China First Heavy Industries with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on China First Heavy Industries, 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.

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