With a median price-to-sales (or "P/S") ratio of close to 1.3x in the Metals and Mining industry in China, you could be forgiven for feeling indifferent about Shenghe Resources Holding Co., Ltd's (SHSE:600392) P/S ratio of 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Shenghe Resources Holding Has Been Performing

Recent times have been advantageous for Shenghe Resources Holding as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Is There Some Revenue Growth Forecasted For Shenghe Resources Holding?

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

Retrospectively, the last year delivered a decent 8.2% gain to the company's revenues. The latest three year period has also seen an excellent 141% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 2.1% during the coming year according to the three analysts following the company. That's not great when the rest of the industry is expected to grow by 13%.

With this information, we find it concerning that Shenghe Resources Holding is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What Does Shenghe Resources Holding's P/S Mean For Investors?

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.

Our check of Shenghe Resources Holding's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shenghe Resources Holding that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.