Shandong Daye Co., Ltd. (SHSE:603278) shareholders are no doubt pleased to see that the share price has bounced 63% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

Even after such a large jump in price, it would still be understandable if you think Shandong Daye is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.7x, considering almost half the companies in China's Metals and Mining industry have P/S ratios above 1.3x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Shandong Daye's P/S Mean For Shareholders?

Shandong Daye hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still 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 Shandong Daye's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 6.3% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 95% 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.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 19% over the next year. With the industry only predicted to deliver 15%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Shandong Daye's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Shandong Daye's stock price has surged recently, but its but its P/S still remains modest. 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.

A look at Shandong Daye's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

Plus, you should also learn about these 3 warning signs we've spotted with Shandong Daye (including 1 which is potentially serious).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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