North Electro-Optic Co.,Ltd.'s (SHSE:600184) Share Price Boosted 30% But Its Business Prospects Need A Lift Too

North Electro-Optic Co.,Ltd. (SHSE:600184) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

Although its price has surged higher, North Electro-OpticLtd's price-to-sales (or "P/S") ratio of 4.1x might still make it look like a buy right now compared to the Aerospace & Defense industry in China, where around half of the companies have P/S ratios above 8.2x and even P/S above 18x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for North Electro-OpticLtd

What Does North Electro-OpticLtd's P/S Mean For Shareholders?

Recent times haven't been great for North Electro-OpticLtd as its revenue has been falling quicker than most other companies. The P/S ratio is probably low because investors think this poor revenue performance isn't going to improve at all. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the revenue slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on North Electro-OpticLtd.

How Is North Electro-OpticLtd's Revenue Growth Trending?

In order to justify its P/S ratio, North Electro-OpticLtd would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 42% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 11% as estimated by the only analyst watching the company. With the industry predicted to deliver 64% growth, the company is positioned for a weaker revenue result.

With this information, we can see why North Electro-OpticLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Despite North Electro-OpticLtd's share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of North Electro-OpticLtd's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

Having said that, be aware North Electro-OpticLtd is showing 2 warning signs in our investment analysis, you should know about.

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.