You may think that with a price-to-sales (or "P/S") ratio of 7.6x Xiamen Meiya Pico Information Co.,LTD. (SZSE:300188) is a stock to avoid completely, seeing as almost half of all the Electronic companies in China have P/S ratios under 4.4x and even P/S lower than 2x aren't out of the ordinary. 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.

View our latest analysis for Xiamen Meiya Pico InformationLTD

What Does Xiamen Meiya Pico InformationLTD's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Xiamen Meiya Pico InformationLTD's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

Xiamen Meiya Pico InformationLTD's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 20% 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.

Turning to the outlook, the next year should generate growth of 56% as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 64% growth forecast for the broader industry.

With this information, we find it concerning that Xiamen Meiya Pico InformationLTD is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Xiamen Meiya Pico InformationLTD's P/S?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It comes as a surprise to see Xiamen Meiya Pico InformationLTD trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Xiamen Meiya Pico InformationLTD has 1 warning sign we think you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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