When close to half the companies in the Machinery industry in China have price-to-sales ratios (or "P/S") below 3.3x, you may consider Shenyang Yuanda Intellectual Industry Group Co.,Ltd (SZSE:002689) as a stock to potentially avoid with its 4.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenyang Yuanda Intellectual Industry GroupLtd

What Does Shenyang Yuanda Intellectual Industry GroupLtd's Recent Performance Look Like?

Shenyang Yuanda Intellectual Industry GroupLtd has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Shenyang Yuanda Intellectual Industry GroupLtd?

The only time you'd be truly comfortable seeing a P/S as high as Shenyang Yuanda Intellectual Industry GroupLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. Revenue has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Shenyang Yuanda Intellectual Industry GroupLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Shenyang Yuanda Intellectual Industry GroupLtd's P/S

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shenyang Yuanda Intellectual Industry GroupLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenyang Yuanda Intellectual Industry GroupLtd (of which 1 is potentially serious!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.