Unfortunately for some shareholders, the Sichuan Huiyuan Optical Communication Co., Ltd. (SZSE:000586) share price has dived 28% in the last thirty days, prolonging recent pain. The recent drop has obliterated the annual return, with the share price now down 7.3% over that longer period.

Although its price has dipped substantially, it's still not a stretch to say that Sichuan Huiyuan Optical Communication's price-to-sales (or "P/S") ratio of 3.6x right now seems quite "middle-of-the-road" compared to the Communications industry in China, where the median P/S ratio is around 4.2x. 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.

See our latest analysis for Sichuan Huiyuan Optical Communication

How Has Sichuan Huiyuan Optical Communication Performed Recently?

Revenue has risen firmly for Sichuan Huiyuan Optical Communication recently, which is pleasing to see. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Sichuan Huiyuan Optical Communication will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Sichuan Huiyuan Optical Communication's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The latest three year period has also seen a 5.7% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 43% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Sichuan Huiyuan Optical Communication's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Sichuan Huiyuan Optical Communication's P/S

Following Sichuan Huiyuan Optical Communication's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

We've established that Sichuan Huiyuan Optical Communication's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 1 warning sign for Sichuan Huiyuan Optical Communication that you should be aware of.

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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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.