Hangzhou Zhongya Machinery Co., Ltd.'s (SZSE:300512) Shareholders Might Be Looking For Exit

There wouldn't be many who think Hangzhou Zhongya Machinery Co., Ltd.'s (SZSE:300512) price-to-sales (or "P/S") ratio of 2.4x is worth a mention when the median P/S for the Machinery industry in China is similar at about 3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Hangzhou Zhongya Machinery

How Hangzhou Zhongya Machinery Has Been Performing

Hangzhou Zhongya Machinery has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Hangzhou Zhongya Machinery will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hangzhou Zhongya Machinery will help you shine a light on its historical performance.

How Is Hangzhou Zhongya Machinery's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 9.2% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 12% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

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.

With this in mind, we find it intriguing that Hangzhou Zhongya Machinery's P/S is comparable to that of its industry peers. 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. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What Does Hangzhou Zhongya Machinery's P/S Mean For Investors?

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've established that Hangzhou Zhongya Machinery'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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Hangzhou Zhongya Machinery (2 make us uncomfortable!) that you need to be mindful 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.