Shenzhen EXC-LED Technology Co.Ltd (SZSE:300889) Investors Are Less Pessimistic Than Expected

It's not a stretch to say that Shenzhen EXC-LED Technology Co.Ltd's (SZSE:300889) price-to-sales (or "P/S") ratio of 1.7x right now seems quite "middle-of-the-road" for companies in the Electrical industry in China, where the median P/S ratio is around 2x. 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.

Check out our latest analysis for Shenzhen EXC-LED TechnologyLtd

What Does Shenzhen EXC-LED TechnologyLtd's P/S Mean For Shareholders?

Shenzhen EXC-LED TechnologyLtd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't 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 Shenzhen EXC-LED TechnologyLtd will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Shenzhen EXC-LED TechnologyLtd?

The only time you'd be comfortable seeing a P/S like Shenzhen EXC-LED TechnologyLtd's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 13% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Shenzhen EXC-LED TechnologyLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Shenzhen EXC-LED TechnologyLtd's P/S?

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've established that Shenzhen EXC-LED TechnologyLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Shenzhen EXC-LED TechnologyLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Shenzhen EXC-LED 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com