Some Confidence Is Lacking In Changsha DIALINE New Material Sci.&Tech. Co., Ltd.'s (SZSE:300700) P/S

When close to half the companies in the Machinery industry in China have price-to-sales ratios (or "P/S") below 3.6x, you may consider Changsha DIALINE New Material Sci.&Tech. Co., Ltd. (SZSE:300700) as a stock to avoid entirely with its 9.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for Changsha DIALINE New Material Sci.&Tech

How Changsha DIALINE New Material Sci.&Tech Has Been Performing

For example, consider that Changsha DIALINE New Material Sci.&Tech'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 Changsha DIALINE New Material Sci.&Tech's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Changsha DIALINE New Material Sci.&Tech's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 57% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 67% in total over the last three years. So we can start by confirming that the company has generally done a very 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 23% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Changsha DIALINE New Material Sci.&Tech is trading at a P/S higher than the industry. 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.

The Key Takeaway

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 Changsha DIALINE New Material Sci.&Tech 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

It is also worth noting that we have found 1 warning sign for Changsha DIALINE New Material Sci.&Tech that you need to take into consideration.

If you're unsure about the strength of Changsha DIALINE New Material Sci.&Tech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.