Those holding Wencan Group Co., Ltd. (SHSE:603348) shares would be relieved that the share price has rebounded 32% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 46% over that time.

In spite of the firm bounce in price, given about half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") above 2.3x, you may still consider Wencan Group as an attractive investment with its 1.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Wencan Group's P/S Mean For Shareholders?

Wencan Group could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

How Is Wencan Group's Revenue Growth Trending?

In order to justify its P/S ratio, Wencan Group would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 2.5%. Pleasingly, revenue has also lifted 170% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 30% as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

With this information, we find it odd that Wencan Group is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Despite Wencan Group's share price climbing recently, its P/S still lags most other companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

To us, it seems Wencan Group currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. 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. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Wencan Group (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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.