With a price-to-sales (or "P/S") ratio of 2.9x Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) may be sending bullish signals at the moment, given that almost half of all the Communications companies in China have P/S ratios greater than 5x and even P/S higher than 8x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Huizhou Speed Wireless TechnologyLtd

What Does Huizhou Speed Wireless TechnologyLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Huizhou Speed Wireless TechnologyLtd over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Huizhou Speed Wireless TechnologyLtd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Huizhou Speed Wireless TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 11% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 42% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Huizhou Speed Wireless TechnologyLtd's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

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.

Our examination of Huizhou Speed Wireless TechnologyLtd confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for Huizhou Speed Wireless TechnologyLtd that we have uncovered.

If you're unsure about the strength of Huizhou Speed Wireless TechnologyLtd'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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