What Chongqing Zaisheng Technology Co., Ltd.'s (SHSE:603601) P/S Is Not Telling You

There wouldn't be many who think Chongqing Zaisheng Technology Co., Ltd.'s (SHSE:603601) price-to-sales (or "P/S") ratio of 1.9x is worth a mention when the median P/S for the Chemicals industry in China is similar at about 2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Chongqing Zaisheng Technology

How Chongqing Zaisheng Technology Has Been Performing

Chongqing Zaisheng Technology could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chongqing Zaisheng Technology.

Is There Some Revenue Growth Forecasted For Chongqing Zaisheng Technology?

In order to justify its P/S ratio, Chongqing Zaisheng Technology would need to produce growth that's similar to 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 4.0%. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 18% over the next year. That's shaping up to be materially lower than the 23% growth forecast for the broader industry.

In light of this, it's curious that Chongqing Zaisheng Technology's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Chongqing Zaisheng Technology'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.

Our look at the analysts forecasts of Chongqing Zaisheng Technology's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Chongqing Zaisheng Technology (1 is a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Chongqing Zaisheng Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.