You might think that Li Auto Inc. it has a price-to-sales ratio (or "P/S") of 3.9x. (NASDAQ: LI ) is a stock worth checking out, as nearly half of all US auto companies have a P/S ratio above 4.9x, and it's not unusual for a P/S above 10x. While it is not reasonable to take P/S at face value, it may explain why it is limited.
Check out our latest Li Auto analysis
How Li Auto works
Li Auto can do better as profits have grown less recently than other companies. The P/S ratio is likely low because investors believe this poor earnings performance will not improve. If you still like the company, you hope the earnings won't hurt you and you can buy some shares if not.
Want a complete picture of analyst ratings for a company? Then our free Lee Auto report will help you find out what's on the horizon.
What are Li Auto's revenue growth trends?
Li Auto's P/S ratio would be typical of a company with limited expected growth and, more importantly, an underperforming industry.
If we look at the revenue growth over the past year, the company has shown a huge growth of 68%. The past three years have also seen impressive growth in total revenue driven by strong short-term performance. As a result, shareholders will be encouraged by medium-term earnings growth rates.
According to analysts who follow the company, revenue is expected to grow by 56% annually over the next three years. It turned out that this would be well below the industry forecast of 247% annual growth.
With this in mind, it becomes clear why P/S Li Auto is not far behind its peers in the industry. Most investors expect limited growth in the future and are willing to pay less for the stock.
The last word
As a general rule, we would avoid reading too much into the price-to-sales ratio when making investment decisions, even though it can tell you a lot about what other market participants think about the company.
As expected, an analysis of analyst forecasts for Li Auto confirms that the company's weak revenue forecasts are the main driver of its low P/S. At this stage, investors believe that the potential for earnings improvement is not sufficient to justify a higher P/S ratio. If these conditions do not improve, they will continue to hamper the share price around these levels.
You should also know these 1 warning signs we noticed with Li Auto .
If these risks have you reconsidering your opinion of Li Auto , check out our interactive list of high-quality stocks to see what else is out there.
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This Simply Wall St article is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended as financial advice. This is not a recommendation to buy or sell shares and does not take into account your goals or financial situation. We aim to provide careful longitudinal research based on primary data. Please note that our analysis may not include advertising from end-user companies or quality content based on price. Simply Wall St does not hold any positions in listed stocks.
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