Despite an already strong run, Suzhou QingYue Optoelectronics Technology Co., Ltd. (SHSE:688496) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 147% in the last year.

Following the firm bounce in price, when almost half of the companies in China's Semiconductor industry have price-to-sales ratios (or "P/S") below 7.6x, you may consider Suzhou QingYue Optoelectronics Technology as a stock not worth researching with its 12.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Suzhou QingYue Optoelectronics Technology

What Does Suzhou QingYue Optoelectronics Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Suzhou QingYue Optoelectronics Technology over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Suzhou QingYue Optoelectronics Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Suzhou QingYue Optoelectronics Technology's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 66% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

This is in contrast to the rest of the industry, which is expected to grow by 40% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Suzhou QingYue Optoelectronics Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

The strong share price surge has lead to Suzhou QingYue Optoelectronics Technology's P/S soaring as well. 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.

Our examination of Suzhou QingYue Optoelectronics Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Suzhou QingYue Optoelectronics Technology that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.