Sichuan Huiyuan Optical Communication Co., Ltd. (SZSE:000586) shareholders are no doubt pleased to see that the share price has bounced 39% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 3.9% isn't as impressive.

Although its price has surged higher, it's still not a stretch to say that Sichuan Huiyuan Optical Communication's price-to-sales (or "P/S") ratio of 4.5x right now seems quite "middle-of-the-road" compared to the Communications industry in China, where the median P/S ratio is around 4.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Sichuan Huiyuan Optical Communication Performed Recently?

The revenue growth achieved at Sichuan Huiyuan Optical Communication over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Sichuan Huiyuan Optical Communication will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Some Revenue Growth Forecasted For Sichuan Huiyuan Optical Communication?

The only time you'd be comfortable seeing a P/S like Sichuan Huiyuan Optical Communication's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 12%. The solid recent performance means it was also able to grow revenue by 5.7% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 50% shows it's noticeably less attractive.

With this in mind, we find it intriguing that Sichuan Huiyuan Optical Communication's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Sichuan Huiyuan Optical Communication's P/S

Its shares have lifted substantially and now Sichuan Huiyuan Optical Communication's P/S is back within range of the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sichuan Huiyuan Optical Communication's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sichuan Huiyuan Optical Communication (1 is significant) you should be aware of.

If these risks are making you reconsider your opinion on Sichuan Huiyuan Optical Communication, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.