With a price-to-sales (or "P/S") ratio of 0.4x Beiqi Foton Motor Co.,Ltd. (SHSE:600166) may be sending bullish signals at the moment, given that almost half of all the Auto companies in China have P/S ratios greater than 1.9x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Beiqi Foton MotorLtd Has Been Performing

With revenue growth that's superior to most other companies of late, Beiqi Foton MotorLtd has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Beiqi Foton MotorLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 18%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 23% as estimated by the only analyst watching the company. With the industry predicted to deliver 63% growth, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Beiqi Foton MotorLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

We've established that Beiqi Foton MotorLtd maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

You always need to take note of risks, for example - Beiqi Foton MotorLtd has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Beiqi Foton MotorLtd'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.