Revenues Not Telling The Story For Dongfeng Motor Group Company Limited (HKG:489) After Shares Rise 60%

Explore Dongfeng Motor Group's Fair Values from the Community and select yours

Dongfeng Motor Group Company Limited (HKG:489) shareholders would be excited to see that the share price has had a great month, posting a 60% gain and recovering from prior weakness. The last month tops off a massive increase of 200% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Dongfeng Motor Group's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in Hong Kong's Auto industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Dongfeng Motor Group

What Does Dongfeng Motor Group's P/S Mean For Shareholders?

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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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Is There Some Revenue Growth Forecasted For Dongfeng Motor Group?

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

Retrospectively, the last year delivered a decent 6.9% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 6.2% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 13% per annum as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 18% per annum, which is noticeably more attractive.

With this information, we find it interesting that Dongfeng Motor Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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 Final Word

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.

When you consider that Dongfeng Motor Group'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. 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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Dongfeng Motor Group with six simple checks.

If these risks are making you reconsider your opinion on Dongfeng Motor Group, 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.