More Unpleasant Surprises Could Be In Store For Shenyang Blue Silver Industry Automation Equipment Co., Ltd's (SZSE:300293) Shares After Tumbling 25%

Shenyang Blue Silver Industry Automation Equipment Co., Ltd (SZSE:300293) shares have had a horrible month, losing 25% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 50%, which is great even in a bull market.

Although its price has dipped substantially, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.8x, you may still consider Shenyang Blue Silver Industry Automation Equipment as a stock not worth researching with its 5.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenyang Blue Silver Industry Automation Equipment

How Has Shenyang Blue Silver Industry Automation Equipment Performed Recently?

For example, consider that Shenyang Blue Silver Industry Automation Equipment's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 Shenyang Blue Silver Industry Automation Equipment's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenyang Blue Silver Industry Automation Equipment's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 26% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Shenyang Blue Silver Industry Automation Equipment's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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 We Can Learn From Shenyang Blue Silver Industry Automation Equipment's P/S?

Shenyang Blue Silver Industry Automation Equipment's shares may have suffered, but its P/S remains high. 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.

Our examination of Shenyang Blue Silver Industry Automation Equipment revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shenyang Blue Silver Industry Automation Equipment that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.