Improved Revenues Required Before Fuxin Dare Automotive Parts Co., Ltd. (SZSE:300473) Stock's 41% Jump Looks Justified

Simply Wall St · 10/21 22:24

Despite an already strong run, Fuxin Dare Automotive Parts Co., Ltd. (SZSE:300473) shares have been powering on, with a gain of 41% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

In spite of the firm bounce in price, considering around half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") above 2.2x, you may still consider Fuxin Dare Automotive Parts as an solid investment opportunity with its 0.8x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Fuxin Dare Automotive Parts

ps-multiple-vs-industry
SZSE:300473 Price to Sales Ratio vs Industry October 21st 2024

What Does Fuxin Dare Automotive Parts' P/S Mean For Shareholders?

The recent revenue growth at Fuxin Dare Automotive Parts would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If you 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.

Although there are no analyst estimates available for Fuxin Dare Automotive Parts, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Fuxin Dare Automotive Parts would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.1% last year. The latest three year period has also seen a 14% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Fuxin Dare Automotive Parts' P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Fuxin Dare Automotive Parts' P/S?

Despite Fuxin Dare Automotive Parts' 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.

In line with expectations, Fuxin Dare Automotive Parts maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Fuxin Dare Automotive Parts is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

If you're unsure about the strength of Fuxin Dare Automotive Parts' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.