Yes Optoelectronics (Group) Co., Ltd. (SZSE:002952) shares have had a really impressive month, gaining 111% after a shaky period beforehand. The annual gain comes to 147% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Yes Optoelectronics (Group) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.3x, considering almost half the companies in China's Tech industry have P/S ratios below 4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Yes Optoelectronics (Group)

What Does Yes Optoelectronics (Group)'s Recent Performance Look Like?

For instance, Yes Optoelectronics (Group)'s receding revenue in recent times would have to be some food for thought. 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.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Yes Optoelectronics (Group)'s to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.8%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 76% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 28% shows it's noticeably less attractive.

With this information, we find it concerning that Yes Optoelectronics (Group) 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.

The Bottom Line On Yes Optoelectronics (Group)'s P/S

Shares in Yes Optoelectronics (Group) have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Yes Optoelectronics (Group) 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It is also worth noting that we have found 4 warning signs for Yes Optoelectronics (Group) (2 can't be ignored!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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