Rayitek Hi-Tech Film Company Ltd., Shenzhen's (SHSE:688323) 37% Price Boost Is Out Of Tune With Revenues

Those holding Rayitek Hi-Tech Film Company Ltd., Shenzhen (SHSE:688323) shares would be relieved that the share price has rebounded 37% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 33%.

Since its price has surged higher, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider Rayitek Hi-Tech Film Company Shenzhen as a stock not worth researching with its 8.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Rayitek Hi-Tech Film Company Shenzhen

What Does Rayitek Hi-Tech Film Company Shenzhen's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Rayitek Hi-Tech Film Company Shenzhen, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Rayitek Hi-Tech Film Company Shenzhen's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Rayitek Hi-Tech Film Company Shenzhen's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.9%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

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

With this information, we find it concerning that Rayitek Hi-Tech Film Company Shenzhen is trading at a P/S higher than the industry. 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 very 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 We Can Learn From Rayitek Hi-Tech Film Company Shenzhen's P/S?

Shares in Rayitek Hi-Tech Film Company Shenzhen have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Rayitek Hi-Tech Film Company Shenzhen currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you settle on your opinion, we've discovered 2 warning signs for Rayitek Hi-Tech Film Company Shenzhen that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.