Tianjin Jingwei Huikai Optoelectronic Co., Ltd. (SZSE:300120) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 20%.

Since its price has dipped substantially, Tianjin Jingwei Huikai Optoelectronic's price-to-sales (or "P/S") ratio of 1.4x might make it look like a strong buy right now compared to the wider Electronic industry in China, where around half of the companies have P/S ratios above 3.9x and even P/S above 8x 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.

How Has Tianjin Jingwei Huikai Optoelectronic Performed Recently?

Revenue has risen firmly for Tianjin Jingwei Huikai Optoelectronic recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Tianjin Jingwei Huikai Optoelectronic would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Revenue has also lifted 8.2% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Tianjin Jingwei Huikai Optoelectronic's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Tianjin Jingwei Huikai Optoelectronic's P/S?

Having almost fallen off a cliff, Tianjin Jingwei Huikai Optoelectronic's share price has pulled its P/S way down as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Tianjin Jingwei Huikai Optoelectronic confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Tianjin Jingwei Huikai Optoelectronic you should be aware of.

If you're unsure about the strength of Tianjin Jingwei Huikai Optoelectronic'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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