Hangzhou Prevail Optoelectronic Equipment Co., Ltd. (SZSE:300710) shares have continued their recent momentum with a 32% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Hangzhou Prevail Optoelectronic Equipment's P/S ratio of 5.5x, since the median price-to-sales (or "P/S") ratio for the Communications industry in China is also close to 5.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Hangzhou Prevail Optoelectronic Equipment's P/S Mean For Shareholders?

For example, consider that Hangzhou Prevail Optoelectronic Equipment's financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes the recent run-of-the-mill revenue performance isn't enough to outperform the industry, which has kept the P/S muted. If not, then existing shareholders may be feeling hopeful about the future direction of the share price.

Is There Some Revenue Growth Forecasted For Hangzhou Prevail Optoelectronic Equipment?

In order to justify its P/S ratio, Hangzhou Prevail Optoelectronic Equipment would need to produce growth that's similar to the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 43% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 39% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Hangzhou Prevail Optoelectronic Equipment's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does Hangzhou Prevail Optoelectronic Equipment's P/S Mean For Investors?

Its shares have lifted substantially and now Hangzhou Prevail Optoelectronic Equipment'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.

The fact that Hangzhou Prevail Optoelectronic Equipment currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more 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.

Before you take the next step, you should know about the 2 warning signs for Hangzhou Prevail Optoelectronic Equipment (1 is significant!) that we have uncovered.

If you're unsure about the strength of Hangzhou Prevail Optoelectronic Equipment'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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