Beijing Shougang Co., Ltd.'s (SZSE:000959) Low P/S No Reason For Excitement

Beijing Shougang Co., Ltd.'s (SZSE:000959) price-to-sales (or "P/S") ratio of 0.2x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Metals and Mining industry in China have P/S ratios greater than 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Beijing Shougang

How Beijing Shougang Has Been Performing

Recent times haven't been great for Beijing Shougang as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

How Is Beijing Shougang's Revenue Growth Trending?

In order to justify its P/S ratio, Beijing Shougang would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 4.4% as estimated by the dual analysts watching the company. Meanwhile, the broader industry is forecast to expand by 13%, which paints a poor picture.

With this in consideration, we find it intriguing that Beijing Shougang's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Beijing Shougang'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 Beijing Shougang's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Beijing Shougang's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Beijing Shougang (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

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.

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.