Fujian Furi Electronics Co.,Ltd's (SHSE:600203) Share Price Could Signal Some Risk

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Trade Distributors industry in China, you could be forgiven for feeling indifferent about Fujian Furi Electronics Co.,Ltd's (SHSE:600203) P/S ratio of 0.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Fujian Furi ElectronicsLtd

How Fujian Furi ElectronicsLtd Has Been Performing

As an illustration, revenue has deteriorated at Fujian Furi ElectronicsLtd over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fujian Furi ElectronicsLtd will help you shine a light on its historical performance.

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

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 36%. As a result, revenue from three years ago have also fallen 3.4% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Fujian Furi ElectronicsLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Fujian Furi ElectronicsLtd's P/S Mean For Investors?

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.

We find it unexpected that Fujian Furi ElectronicsLtd trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Fujian Furi ElectronicsLtd (1 doesn't sit too well with us) you should be aware of.

If these risks are making you reconsider your opinion on Fujian Furi ElectronicsLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.