Unpleasant Surprises Could Be In Store For China Steel Corporation's (TWSE:2002) Shares

With a median price-to-sales (or "P/S") ratio of close to 0.8x in the Metals and Mining industry in Taiwan, you could be forgiven for feeling indifferent about China Steel Corporation's (TWSE:2002) P/S ratio, which comes in at about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for China Steel

How Has China Steel Performed Recently?

The recently shrinking revenue for China Steel has been in line with the industry. The P/S ratio is probably moderate because investors think the company's revenue trend will continue to follow the rest of the industry. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues tracking the industry.

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

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.2%. As a result, revenue from three years ago have also fallen 15% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 0.6% as estimated by the nine analysts watching the company. With the industry predicted to deliver 3.4% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that China Steel's P/S is closely matching its industry peers. 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.

What We Can Learn From China Steel'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.

Our look at the analysts forecasts of China Steel'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. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for China Steel that you need to be mindful of.

If you're unsure about the strength of China Steel's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.