With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Auto industry in Hong Kong, you could be forgiven for feeling indifferent about Guangzhou Automobile Group Co., Ltd.'s (HKG:2238) P/S ratio of 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
See our latest analysis for Guangzhou Automobile Group
How Has Guangzhou Automobile Group Performed Recently?
While the industry has experienced revenue growth lately, Guangzhou Automobile Group's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
Want the full picture on analyst estimates for the company? Then our free report on Guangzhou Automobile Group will help you uncover what's on the horizon.How Is Guangzhou Automobile Group's Revenue Growth Trending?
In order to justify its P/S ratio, Guangzhou Automobile Group 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 17%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 41% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 18% per year, which is noticeably more attractive.
In light of this, it's curious that Guangzhou Automobile 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 Guangzhou Automobile Group's P/S
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our look at the analysts forecasts of Guangzhou Automobile 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.
Plus, you should also learn about these 2 warning signs we've spotted with Guangzhou Automobile Group (including 1 which is potentially serious).
If you're unsure about the strength of Guangzhou Automobile Group'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.