DuoLun Technology Corporation Ltd. (SHSE:603528) shares have retraced a considerable 32% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 48%, which is great even in a bull market.

Although its price has dipped substantially, DuoLun Technology may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 10.5x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.4x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for DuoLun Technology

What Does DuoLun Technology's P/S Mean For Shareholders?

For instance, DuoLun Technology's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For DuoLun Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like DuoLun Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 8.2% decrease to the company's top line. As a result, revenue from three years ago have also fallen 1.9% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 64% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that DuoLun Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 We Can Learn From DuoLun Technology's P/S?

DuoLun Technology's shares may have suffered, but its P/S remains high. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that DuoLun Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You need to take note of risks, for example - DuoLun Technology has 5 warning signs (and 3 which don't sit too well with us) we think you should know about.

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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