Shenzhen Refond Optoelectronics Co.,Ltd.'s (SZSE:300241) price-to-sales (or "P/S") ratio of 2.9x might make it look like a strong buy right now compared to the Semiconductor industry in China, where around half of the companies have P/S ratios above 7.5x and even P/S above 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Shenzhen Refond OptoelectronicsLtd

How Has Shenzhen Refond OptoelectronicsLtd Performed Recently?

For example, consider that Shenzhen Refond OptoelectronicsLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Shenzhen Refond OptoelectronicsLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

How Is Shenzhen Refond OptoelectronicsLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Shenzhen Refond OptoelectronicsLtd's is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.1%. Regardless, revenue has managed to lift by a handy 8.5% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

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.

In light of this, it's understandable that Shenzhen Refond OptoelectronicsLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

In line with expectations, Shenzhen Refond OptoelectronicsLtd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Shenzhen Refond OptoelectronicsLtd (1 is concerning!) that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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