Jiangsu Hongdou Industrial Co.,LTD's (SHSE:600400) Earnings Haven't Escaped The Attention Of Investors

When you see that almost half of the companies in the Luxury industry in China have price-to-sales ratios (or "P/S") below 1.7x, Jiangsu Hongdou Industrial Co.,LTD (SHSE:600400) looks to be giving off some sell signals with its 2.7x 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 as high as it is.

See our latest analysis for Jiangsu Hongdou IndustrialLTD

What Does Jiangsu Hongdou IndustrialLTD's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Jiangsu Hongdou IndustrialLTD's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Jiangsu Hongdou IndustrialLTD's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Jiangsu Hongdou IndustrialLTD's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Jiangsu Hongdou IndustrialLTD's is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.7%. The last three years don't look nice either as the company has shrunk revenue by 9.2% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 37% during the coming year according to the sole analyst following the company. That's shaping up to be materially higher than the 19% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Jiangsu Hongdou IndustrialLTD's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Jiangsu Hongdou IndustrialLTD's P/S

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.

As we suspected, our examination of Jiangsu Hongdou IndustrialLTD's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Jiangsu Hongdou IndustrialLTD (1 can't be ignored!) that you need to be mindful 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.