There wouldn't be many who think Shandong Linglong Tyre Co.,Ltd.'s (SHSE:601966) price-to-sales (or "P/S") ratio of 1.6x is worth a mention when the median P/S for the Auto Components industry in China is similar at about 2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

How Shandong Linglong TyreLtd Has Been Performing

With revenue growth that's inferior to most other companies of late, Shandong Linglong TyreLtd has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Shandong Linglong TyreLtd would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 28% as estimated by the ten analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 25%, which is noticeably less attractive.

With this information, we find it interesting that Shandong Linglong TyreLtd is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

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.

Looking at Shandong Linglong TyreLtd's analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shandong Linglong TyreLtd with six simple checks will allow you to discover any risks that could be an issue.

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.