Jiangsu Rijiu Optoelectronics Jointstock Co., Ltd's (SZSE:003015) price-to-sales (or "P/S") ratio of 7.2x might make it look like a strong sell right now compared to the Electronic industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Jiangsu Rijiu Optoelectronics

How Jiangsu Rijiu Optoelectronics Has Been Performing

As an illustration, revenue has deteriorated at Jiangsu Rijiu Optoelectronics over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Jiangsu Rijiu Optoelectronics' Revenue Growth Trending?

In order to justify its P/S ratio, Jiangsu Rijiu Optoelectronics would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's top line. As a result, revenue from three years ago have also fallen 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 62% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Jiangsu Rijiu Optoelectronics' P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

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 Jiangsu Rijiu Optoelectronics currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You need to take note of risks, for example - Jiangsu Rijiu Optoelectronics has 5 warning signs (and 2 which are potentially serious) we think you should know about.

If you're unsure about the strength of Jiangsu Rijiu Optoelectronics' 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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