There's Reason For Concern Over InfoVision Optoelectronics (Kunshan) Co., Ltd.'s (SHSE:688055) Massive 53% Price Jump

InfoVision Optoelectronics (Kunshan) Co., Ltd. (SHSE:688055) shares have had a really impressive month, gaining 53% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.5% over the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about InfoVision Optoelectronics (Kunshan)'s P/S ratio of 3.5x, since the median price-to-sales (or "P/S") ratio for the Electronic industry in China is also close to 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for InfoVision Optoelectronics (Kunshan)

How InfoVision Optoelectronics (Kunshan) Has Been Performing

InfoVision Optoelectronics (Kunshan) has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on InfoVision Optoelectronics (Kunshan) will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for InfoVision Optoelectronics (Kunshan), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is InfoVision Optoelectronics (Kunshan)'s Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like InfoVision Optoelectronics (Kunshan)'s is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 9.0% gain to the company's revenues. Still, lamentably revenue has fallen 31% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 26% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that InfoVision Optoelectronics (Kunshan)'s P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 the recent negative growth rates.

The Key Takeaway

Its shares have lifted substantially and now InfoVision Optoelectronics (Kunshan)'s P/S is back within range of the industry median. 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.

We find it unexpected that InfoVision Optoelectronics (Kunshan) trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Having said that, be aware InfoVision Optoelectronics (Kunshan) is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

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.