Omat Advanced Materials (Guangdong) Co.,Ltd. (SHSE:688530) shareholders have had their patience rewarded with a 26% share price jump in the last month. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, Omat Advanced Materials (Guangdong)Ltd may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 9.1x, since almost half of all companies in the Semiconductor in China have P/S ratios under 7.4x and even P/S lower than 3x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Omat Advanced Materials (Guangdong)Ltd's P/S Mean For Shareholders?

For example, consider that Omat Advanced Materials (Guangdong)Ltd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Omat Advanced Materials (Guangdong)Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, Omat Advanced Materials (Guangdong)Ltd would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the industry, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Omat Advanced Materials (Guangdong)Ltd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Omat Advanced Materials (Guangdong)Ltd's P/S Mean For Investors?

Omat Advanced Materials (Guangdong)Ltd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Omat Advanced Materials (Guangdong)Ltd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Omat Advanced Materials (Guangdong)Ltd (1 is a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of Omat Advanced Materials (Guangdong)Ltd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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