Stock Analysis
More Unpleasant Surprises Could Be In Store For Aurora Optoelectronics Co.,Ltd.'s (SHSE:600666) Shares After Tumbling 30%
The Aurora Optoelectronics Co.,Ltd. (SHSE:600666) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. The last month has meant the stock is now only up 7.9% during the last year.
Although its price has dipped substantially, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 2.9x, you may still consider Aurora OptoelectronicsLtd as a stock to avoid entirely with its 16.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
View our latest analysis for Aurora OptoelectronicsLtd
What Does Aurora OptoelectronicsLtd's Recent Performance Look Like?
Aurora OptoelectronicsLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Aurora OptoelectronicsLtd will help you shine a light on its historical performance.What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Aurora OptoelectronicsLtd would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 3.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 39% in total over the last three years. 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 22% 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 alarming that Aurora OptoelectronicsLtd's P/S sits above the majority of other companies. 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.
The Bottom Line On Aurora OptoelectronicsLtd's P/S
A significant share price dive has done very little to deflate Aurora OptoelectronicsLtd's very lofty P/S. 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 examination of Aurora OptoelectronicsLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.
Plus, you should also learn about these 2 warning signs we've spotted with Aurora OptoelectronicsLtd.
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.
About SHSE:600666
Aurora OptoelectronicsLtd
Engages in the research and development, production, and sale of sapphire crystal materials in China.