AVIC (Chengdu)UAS Co., Ltd.'s (SHSE:688297) Share Price Not Quite Adding Up

With a price-to-sales (or "P/S") ratio of 15.5x AVIC (Chengdu)UAS Co., Ltd. (SHSE:688297) may be sending very bearish signals at the moment, given that almost half of all the Aerospace & Defense companies in China have P/S ratios under 8.1x and even P/S lower than 4x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for AVIC (Chengdu)UAS

How Has AVIC (Chengdu)UAS Performed Recently?

Recent times haven't been great for AVIC (Chengdu)UAS as its revenue has been falling quicker than most other companies. Perhaps the market is predicting a change in fortunes for the company and is expecting them to blow past the rest of the industry, elevating the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on AVIC (Chengdu)UAS will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For AVIC (Chengdu)UAS?

AVIC (Chengdu)UAS' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

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 11%. The last three years don't look nice either as the company has shrunk revenue by 31% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 55% during the coming year according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 53%, which is not materially different.

In light of this, it's curious that AVIC (Chengdu)UAS' P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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.

Given AVIC (Chengdu)UAS' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for AVIC (Chengdu)UAS with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of AVIC (Chengdu)UAS' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.