Brilliance Technology Co., Ltd.'s (SZSE:300542) Shares Bounce 46% But Its Business Still Trails The Industry

Brilliance Technology Co., Ltd. (SZSE:300542) shares have continued their recent momentum with a 46% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 32%.

Even after such a large jump in price, Brilliance Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.8x, since almost half of all companies in the IT industry in China have P/S ratios greater than 3.7x and even P/S higher than 7x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Brilliance Technology

What Does Brilliance Technology's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Brilliance Technology has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Brilliance Technology's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Brilliance Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Brilliance Technology would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 30% last year. The latest three year period has also seen an excellent 50% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 9.1% as estimated by the dual analysts watching the company. With the industry predicted to deliver 43% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Brilliance Technology is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

The latest share price surge wasn't enough to lift Brilliance Technology's P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Brilliance Technology's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you settle on your opinion, we've discovered 3 warning signs for Brilliance Technology (1 is potentially serious!) that you should be aware of.

If these risks are making you reconsider your opinion on Brilliance Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.