Risks Still Elevated At These Prices As Hangzhou Mdk Opto Electronics Co.,Ltd (SHSE:688079) Shares Dive 27%

The Hangzhou Mdk Opto Electronics Co.,Ltd (SHSE:688079) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Even after such a large drop in price, given around half the companies in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.4x, you may still consider Hangzhou Mdk Opto ElectronicsLtd as a stock to avoid entirely with its 8.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Hangzhou Mdk Opto ElectronicsLtd

How Has Hangzhou Mdk Opto ElectronicsLtd Performed Recently?

For instance, Hangzhou Mdk Opto ElectronicsLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou Mdk Opto ElectronicsLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hangzhou Mdk Opto ElectronicsLtd?

Hangzhou Mdk Opto ElectronicsLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 24% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this information, we find it concerning that Hangzhou Mdk Opto ElectronicsLtd is trading at a P/S higher than the industry. 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 very 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.

What We Can Learn From Hangzhou Mdk Opto ElectronicsLtd's P/S?

Even after such a strong price drop, Hangzhou Mdk Opto ElectronicsLtd'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.

We've established that Hangzhou Mdk Opto ElectronicsLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Hangzhou Mdk Opto ElectronicsLtd (including 1 which is significant).

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.