Dongfeng Motor Group Company Limited's (HKG:489) 29% Share Price Surge Not Quite Adding Up

Dongfeng Motor Group Company Limited (HKG:489) shares have had a really impressive month, gaining 29% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.2% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Dongfeng Motor Group's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Auto industry in Hong Kong is also close to 0.6x. 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 Dongfeng Motor Group

How Dongfeng Motor Group Has Been Performing

With revenue growth that's inferior to most other companies of late, Dongfeng Motor Group has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is Dongfeng Motor Group's Revenue Growth Trending?

Dongfeng Motor Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. Still, lamentably revenue has fallen 18% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 2.1% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 15% per annum, which is noticeably more attractive.

In light of this, it's curious that Dongfeng Motor Group's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Dongfeng Motor Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at the analysts forecasts of Dongfeng Motor Group's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Dongfeng Motor Group you should be aware of.

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.