Unpleasant Surprises Could Be In Store For Everdisplay Optronics (Shanghai) Co., Ltd.'s (SHSE:688538) Shares

You may think that with a price-to-sales (or "P/S") ratio of 6.4x Everdisplay Optronics (Shanghai) Co., Ltd. (SHSE:688538) is a stock to potentially avoid, seeing as almost half of all the Electronic companies in China have P/S ratios under 4.4x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Everdisplay Optronics (Shanghai)

What Does Everdisplay Optronics (Shanghai)'s P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Everdisplay Optronics (Shanghai) has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Everdisplay Optronics (Shanghai)'s earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Everdisplay Optronics (Shanghai)?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Everdisplay Optronics (Shanghai)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 63% gain to the company's top line. The latest three year period has also seen a 23% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Everdisplay Optronics (Shanghai) 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Everdisplay Optronics (Shanghai)'s P/S

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.

The fact that Everdisplay Optronics (Shanghai) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 2 warning signs we've spotted with Everdisplay Optronics (Shanghai).

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.