What Jiangxi Special Electric Motor Co.,Ltd's (SZSE:002176) P/S Is Not Telling You

When you see that almost half of the companies in the Electrical industry in China have price-to-sales ratios (or "P/S") below 2.3x, Jiangxi Special Electric Motor Co.,Ltd (SZSE:002176) looks to be giving off strong sell signals with its 8.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Jiangxi Special Electric MotorLtd

What Does Jiangxi Special Electric MotorLtd's P/S Mean For Shareholders?

For example, consider that Jiangxi Special Electric MotorLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Special Electric MotorLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Jiangxi Special Electric MotorLtd?

The only time you'd be truly comfortable seeing a P/S as steep as Jiangxi Special Electric MotorLtd's is when the company's growth is on track to outshine the industry decidedly.

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 66%. The last three years don't look nice either as the company has shrunk revenue by 38% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Jiangxi Special Electric MotorLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Jiangxi Special Electric MotorLtd's P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Jiangxi Special Electric MotorLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Jiangxi Special Electric MotorLtd with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Jiangxi Special Electric MotorLtd, 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.