With a price-to-sales (or "P/S") ratio of 0.2x Beijing Urban Construction Investment & Development Co., Ltd. (SHSE:600266) may be sending bullish signals at the moment, given that almost half of all the Real Estate companies in China have P/S ratios greater than 1.6x and even P/S higher than 4x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Beijing Urban Construction Investment & Development's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Beijing Urban Construction Investment & Development has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Is There Any Revenue Growth Forecasted For Beijing Urban Construction Investment & Development?

In order to justify its P/S ratio, Beijing Urban Construction Investment & Development would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 46% gain to the company's top line. Pleasingly, revenue has also lifted 167% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue growth is heading into negative territory, declining 1.2% per annum over the next three years. That's not great when the rest of the industry is expected to grow by 1.0% per year.

In light of this, it's understandable that Beijing Urban Construction Investment & Development's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's clear to see that Beijing Urban Construction Investment & Development maintains its low P/S on the weakness of its forecast for sliding revenue, 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. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you take the next step, you should know about the 3 warning signs for Beijing Urban Construction Investment & Development (1 is a bit concerning!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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