Toyou Feiji Electronics Co., Ltd.'s (SZSE:300302) Shares Climb 35% But Its Business Is Yet to Catch Up

Toyou Feiji Electronics Co., Ltd. (SZSE:300302) shares have continued their recent momentum with a 35% gain in the last month alone. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, you could be forgiven for thinking Toyou Feiji Electronics is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 22.4x, considering almost half the companies in China's Software industry have P/S ratios below 7.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Toyou Feiji Electronics

How Toyou Feiji Electronics Has Been Performing

The recent revenue growth at Toyou Feiji Electronics would have to be considered satisfactory if not spectacular. 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. 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 Toyou Feiji Electronics will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Toyou Feiji Electronics?

In order to justify its P/S ratio, Toyou Feiji Electronics would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 5.3% gain to the company's revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 33% shows it's noticeably less attractive.

With this in mind, we find it worrying that Toyou Feiji Electronics' P/S exceeds that of its industry peers. 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. 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 recent growth rates.

What Does Toyou Feiji Electronics' P/S Mean For Investors?

The strong share price surge has lead to Toyou Feiji Electronics' P/S soaring as well. 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.

The fact that Toyou Feiji Electronics currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Toyou Feiji Electronics 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.