Jiangsu Huasheng Tianlong Photoelectric Co.,Ltd.'s (SZSE:300029) 28% Share Price Plunge Could Signal Some Risk

The Jiangsu Huasheng Tianlong Photoelectric Co.,Ltd. (SZSE:300029) share price has softened a substantial 28% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

Although its price has dipped substantially, you could still be forgiven for thinking Jiangsu Huasheng Tianlong PhotoelectricLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in China's Construction industry have P/S ratios below 1.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Jiangsu Huasheng Tianlong PhotoelectricLtd

What Does Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S Mean For Shareholders?

For example, consider that Jiangsu Huasheng Tianlong PhotoelectricLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Jiangsu Huasheng Tianlong PhotoelectricLtd's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. Even so, admirably revenue has lifted 36% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 13% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Jiangsu Huasheng Tianlong PhotoelectricLtd's P/S Mean For Investors?

Jiangsu Huasheng Tianlong PhotoelectricLtd's shares may have suffered, but its P/S remains high. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We didn't expect to see Jiangsu Huasheng Tianlong PhotoelectricLtd trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Jiangsu Huasheng Tianlong PhotoelectricLtd you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.