Shenzhen Refond Optoelectronics Co.,Ltd.'s (SZSE:300241) price-to-sales (or "P/S") ratio of 2.2x 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 5.2x and even P/S above 9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

How Has Shenzhen Refond OptoelectronicsLtd Performed Recently?

Shenzhen Refond OptoelectronicsLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. 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.

Is There Any Revenue Growth Forecasted For Shenzhen Refond OptoelectronicsLtd?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Shenzhen Refond OptoelectronicsLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.2% gain to the company's revenues. The latest three year period has also seen a 6.8% 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.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 34% shows it's noticeably less attractive.

With this information, we can see why Shenzhen Refond OptoelectronicsLtd is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shenzhen Refond OptoelectronicsLtd's P/S?

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.

As we suspected, our examination of Shenzhen Refond OptoelectronicsLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shenzhen Refond OptoelectronicsLtd, and understanding should be part of your investment process.

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.

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