Perfect Optronics Limited (HKG:8311) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Perfect Optronics' price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" compared to the Electronic industry in Hong Kong, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Perfect Optronics Has Been Performing

For example, consider that Perfect Optronics' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Perfect Optronics' Revenue Growth Trending?

In order to justify its P/S ratio, Perfect Optronics would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 72% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 22% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Perfect Optronics' P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Perfect Optronics' P/S

Perfect Optronics appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 look at Perfect Optronics revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Perfect Optronics has 3 warning signs we think you should be aware of.

If you're unsure about the strength of Perfect Optronics' 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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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.