With A 26% Price Drop For Beijing Tricolor Technology Co., Ltd (SHSE:603516) You'll Still Get What You Pay For

Beijing Tricolor Technology Co., Ltd (SHSE:603516) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 65% in the last year.

In spite of the heavy fall in price, given around half the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.2x, you may still consider Beijing Tricolor Technology as a stock to avoid entirely with its 11x 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.

View our latest analysis for Beijing Tricolor Technology

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

Beijing Tricolor Technology certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Beijing Tricolor Technology?

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

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. Still, revenue has fallen 2.3% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 71% during the coming year according to the lone analyst following the company. With the industry only predicted to deliver 25%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Beijing Tricolor Technology's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Beijing Tricolor Technology's P/S?

Even after such a strong price drop, Beijing Tricolor Technology's P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Beijing Tricolor Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Beijing Tricolor Technology is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

If you're unsure about the strength of Beijing Tricolor Technology'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.