Some Confidence Is Lacking In Wuxi Huadong Heavy Machinery Co., Ltd.'s (SZSE:002685) P/S

There wouldn't be many who think Wuxi Huadong Heavy Machinery Co., Ltd.'s (SZSE:002685) price-to-sales (or "P/S") ratio of 2.7x is worth a mention when the median P/S for the Machinery industry in China is similar at about 2.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Wuxi Huadong Heavy Machinery

How Has Wuxi Huadong Heavy Machinery Performed Recently?

Recent times have been quite advantageous for Wuxi Huadong Heavy Machinery as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. Those who are bullish on Wuxi Huadong Heavy Machinery will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Wuxi Huadong Heavy Machinery's earnings, revenue and cash flow.

How Is Wuxi Huadong Heavy Machinery's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Wuxi Huadong Heavy Machinery's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 36% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 87% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Wuxi Huadong Heavy Machinery'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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Wuxi Huadong Heavy Machinery's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We find it unexpected that Wuxi Huadong Heavy Machinery trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Wuxi Huadong Heavy Machinery (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Wuxi Huadong Heavy Machinery, 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.