Some Confidence Is Lacking In Jilin Liyuan Precision Manufacturing Co., Ltd. (SZSE:002501) As Shares Slide 26%

The Jilin Liyuan Precision Manufacturing Co., Ltd. (SZSE:002501) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 22%.

Although its price has dipped substantially, you could still be forgiven for thinking Jilin Liyuan Precision Manufacturing is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.8x, considering almost half the companies in China's Metals and Mining industry have P/S ratios below 1.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Jilin Liyuan Precision Manufacturing

What Does Jilin Liyuan Precision Manufacturing's P/S Mean For Shareholders?

For example, consider that Jilin Liyuan Precision Manufacturing's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jilin Liyuan Precision Manufacturing will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Jilin Liyuan Precision Manufacturing's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 13% overall rise in revenue. 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.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 14% shows it's noticeably less attractive.

In light of this, it's alarming that Jilin Liyuan Precision Manufacturing's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

A significant share price dive has done very little to deflate Jilin Liyuan Precision Manufacturing's very lofty P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Jilin Liyuan Precision Manufacturing revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Jilin Liyuan Precision Manufacturing you should know about.

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.