Zhejiang RIFA Precision Machinery Co., Ltd.'s (SZSE:002520) Price Is Right But Growth Is Lacking After Shares Rocket 34%

Zhejiang RIFA Precision Machinery Co., Ltd. (SZSE:002520) shares have continued their recent momentum with a 34% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 7.4% isn't as attractive.

Even after such a large jump in price, Zhejiang RIFA Precision Machinery may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.6x, since almost half of all companies in the Machinery industry in China have P/S ratios greater than 3.3x and even P/S higher than 6x are not unusual. 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 Zhejiang RIFA Precision Machinery

How Has Zhejiang RIFA Precision Machinery Performed Recently?

It looks like revenue growth has deserted Zhejiang RIFA Precision Machinery recently, which is not something to boast about. It might be that many expect the uninspiring revenue performance to worsen, which has repressed the P/S. 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.

Although there are no analyst estimates available for Zhejiang RIFA Precision Machinery, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Zhejiang RIFA Precision Machinery's is when the company's growth is on track to lag the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 1.1% overall from three years ago. 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 25% shows it's an unpleasant look.

With this information, we are not surprised that Zhejiang RIFA Precision Machinery is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Zhejiang RIFA Precision Machinery's P/S?

The latest share price surge wasn't enough to lift Zhejiang RIFA Precision Machinery's P/S close to the industry median. 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.

Our examination of Zhejiang RIFA Precision Machinery confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Zhejiang RIFA Precision Machinery (1 makes us a bit uncomfortable!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.