Some Confidence Is Lacking In Dongfeng Motor Group Company Limited (HKG:489) As Shares Slide 25%

Dongfeng Motor Group Company Limited (HKG:489) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 44% in the last year.

In spite of the heavy fall 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. 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 Recent Performance Look Like?

Dongfeng Motor Group could be doing better as it's been growing revenue less than most other companies lately. 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.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Dongfeng Motor Group's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.9% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 6.2% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 12% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 18% 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. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Dongfeng Motor Group's P/S

With its share price dropping off a cliff, the P/S for Dongfeng Motor Group looks to be in line with the rest of the Auto industry. 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 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. 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Dongfeng Motor Group with six simple checks on some of these key factors.

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.