Shanghai Aj Group Co.,Ltd (SHSE:600643) Investors Are Less Pessimistic Than Expected

Shanghai Aj Group Co.,Ltd's (SHSE:600643) price-to-sales (or "P/S") ratio of 3.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Diversified Financial industry in China have P/S ratios below 2.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Shanghai Aj GroupLtd

What Does Shanghai Aj GroupLtd's P/S Mean For Shareholders?

Revenue has risen firmly for Shanghai Aj GroupLtd recently, which is pleasing to see. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Shanghai Aj GroupLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai Aj GroupLtd?

In order to justify its P/S ratio, Shanghai Aj GroupLtd would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. However, this wasn't enough as the latest three year period has seen an unpleasant 47% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 6.1% shows it's an unpleasant look.

In light of this, it's alarming that Shanghai Aj GroupLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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 Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shanghai Aj GroupLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shanghai Aj GroupLtd that you need to be mindful of.

If you're unsure about the strength of Shanghai Aj GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.