United Faith Auto-Engineering Co.,Ltd.'s (SZSE:301112) 31% Price Boost Is Out Of Tune With Revenues

United Faith Auto-Engineering Co.,Ltd. (SZSE:301112) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 33%.

Since its price has surged higher, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.4x, you may consider United Faith Auto-EngineeringLtd as a stock not worth researching with its 6.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for United Faith Auto-EngineeringLtd

What Does United Faith Auto-EngineeringLtd's P/S Mean For Shareholders?

The revenue growth achieved at United Faith Auto-EngineeringLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on United Faith Auto-EngineeringLtd will help you shine a light on its historical performance.

How Is United Faith Auto-EngineeringLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as United Faith Auto-EngineeringLtd's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 3.8% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 23% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that United Faith Auto-EngineeringLtd is trading at a P/S higher than the industry. 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 very 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.

The Bottom Line On United Faith Auto-EngineeringLtd's P/S

The strong share price surge has lead to United Faith Auto-EngineeringLtd's P/S soaring as well. 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.

We've established that United Faith Auto-EngineeringLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider and we've discovered 4 warning signs for United Faith Auto-EngineeringLtd (1 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of United Faith Auto-EngineeringLtd'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.