VinFast Auto Ltd.'s (NASDAQ:VFS) 67% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

VinFast Auto Ltd. (NASDAQ:VFS) shares have had a horrible month, losing 67% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 13% share price drop.

Although its price has dipped substantially, VinFast Auto may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 21.4x, since almost half of all companies in the Auto industry in the United States have P/S ratios under 5.4x and even P/S lower than 0.8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for VinFast Auto

What Does VinFast Auto's P/S Mean For Shareholders?

Recent times have been quite advantageous for VinFast Auto as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Although there are no analyst estimates available for VinFast Auto, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For VinFast Auto?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like VinFast Auto's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 48% gain to the company's top line. The latest three year period has also seen an excellent 65% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 321% shows it's noticeably less attractive.

With this information, we find it concerning that VinFast Auto is trading at a P/S higher than the industry. 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 Final Word

Even after such a strong price drop, VinFast Auto's P/S still exceeds the industry median significantly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of VinFast Auto 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - VinFast Auto has 4 warning signs we think you should be aware of.

If you're unsure about the strength of VinFast Auto'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.