SKSHU Paint Co.,Ltd.'s (SHSE:603737) Share Price Could Signal Some Risk

With a median price-to-sales (or "P/S") ratio of close to 2.3x in the Chemicals industry in China, you could be forgiven for feeling indifferent about SKSHU Paint Co.,Ltd.'s (SHSE:603737) P/S ratio of 1.8x. 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.

Check out our latest analysis for SKSHU PaintLtd

How SKSHU PaintLtd Has Been Performing

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

Want the full picture on analyst estimates for the company? Then our free report on SKSHU PaintLtd will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For SKSHU PaintLtd?

In order to justify its P/S ratio, SKSHU PaintLtd would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 4.6% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 9.9% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 15% over the next year. With the industry predicted to deliver 25% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that SKSHU PaintLtd's P/S is closely matching its industry peers. 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that SKSHU PaintLtd's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 3 warning signs for SKSHU PaintLtd (1 is significant!) that you need to take into consideration.

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.