Risks To Shareholder Returns Are Elevated At These Prices For Changzhou Nrb Corporation (SZSE:002708)

With a median price-to-sales (or "P/S") ratio of close to 2.4x in the Machinery industry in China, you could be forgiven for feeling indifferent about Changzhou Nrb Corporation's (SZSE:002708) P/S ratio of 2.1x. 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.

View our latest analysis for Changzhou Nrb

What Does Changzhou Nrb's Recent Performance Look Like?

Recent times have been quite advantageous for Changzhou Nrb as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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 Changzhou Nrb's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Changzhou Nrb's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 37% last year. The latest three year period has also seen an excellent 32% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.

With this information, we find it interesting that Changzhou Nrb is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Changzhou Nrb's P/S

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.

We've established that Changzhou Nrb's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Changzhou Nrb (1 doesn't sit too well with us!) that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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