Revenues Tell The Story For Guangzhou Fangbang Electronics Co.,Ltd (SHSE:688020) As Its Stock Soars 26%

Despite an already strong run, Guangzhou Fangbang Electronics Co.,Ltd (SHSE:688020) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.

Since its price has surged higher, Guangzhou Fangbang ElectronicsLtd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 10.7x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.6x and even P/S lower than 2x aren't out of the ordinary. 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 Guangzhou Fangbang ElectronicsLtd

What Does Guangzhou Fangbang ElectronicsLtd's P/S Mean For Shareholders?

Guangzhou Fangbang ElectronicsLtd hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Guangzhou Fangbang ElectronicsLtd will help you uncover what's on the horizon.

How Is Guangzhou Fangbang ElectronicsLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangzhou Fangbang ElectronicsLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 23% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 82% as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 27% growth forecast for the broader industry.

In light of this, it's understandable that Guangzhou Fangbang ElectronicsLtd'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.

The Bottom Line On Guangzhou Fangbang ElectronicsLtd's P/S

The strong share price surge has lead to Guangzhou Fangbang ElectronicsLtd's P/S soaring as well. 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 Guangzhou Fangbang ElectronicsLtd maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electronic industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guangzhou Fangbang ElectronicsLtd you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.