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Harbin Xinguang Optic-Electronics Technology Co.,Ltd. (SHSE:688011) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Simply Wall St ·  Jan 7 06:45

Harbin Xinguang Optic-Electronics Technology Co.,Ltd. (SHSE:688011) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 37% share price drop.

Although its price has dipped substantially, given around half the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.9x, you may still consider Harbin Xinguang Optic-Electronics TechnologyLtd as a stock to avoid entirely with its 10.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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SHSE:688011 Price to Sales Ratio vs Industry January 6th 2025

How Has Harbin Xinguang Optic-Electronics TechnologyLtd Performed Recently?

Revenue has risen at a steady rate over the last year for Harbin Xinguang Optic-Electronics TechnologyLtd, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Harbin Xinguang Optic-Electronics TechnologyLtd's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Harbin Xinguang Optic-Electronics TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a worthy increase of 2.9%. However, this wasn't enough as the latest three year period has seen an unpleasant 9.4% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Harbin Xinguang Optic-Electronics TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Harbin Xinguang Optic-Electronics TechnologyLtd's P/S Mean For Investors?

Even after such a strong price drop, Harbin Xinguang Optic-Electronics TechnologyLtd's P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Harbin Xinguang Optic-Electronics TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 1 warning sign for Harbin Xinguang Optic-Electronics TechnologyLtd you should be aware of.

If you're unsure about the strength of Harbin Xinguang Optic-Electronics 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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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.

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