Sichuan Huiyuan Optical Communication Co., Ltd.'s (SZSE:000586) 28% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

The Sichuan Huiyuan Optical Communication Co., Ltd. (SZSE:000586) share price has softened a substantial 28% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 17% in that time.

Although its price has dipped substantially, it's still not a stretch to say that Sichuan Huiyuan Optical Communication's price-to-sales (or "P/S") ratio of 4.3x right now seems quite "middle-of-the-road" compared to the Communications industry in China, where the median P/S ratio is around 4.9x. 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 Sichuan Huiyuan Optical Communication

What Does Sichuan Huiyuan Optical Communication's Recent Performance Look Like?

For example, consider that Sichuan Huiyuan Optical Communication's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Sichuan Huiyuan Optical Communication's earnings, revenue and cash flow.

How Is Sichuan Huiyuan Optical Communication's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Sichuan Huiyuan Optical Communication's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. As a result, revenue from three years ago have also fallen 17% overall. 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 36% shows it's an unpleasant look.

With this information, we find it concerning that Sichuan Huiyuan Optical Communication is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

With its share price dropping off a cliff, the P/S for Sichuan Huiyuan Optical Communication looks to be in line with the rest of the Communications industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Sichuan Huiyuan Optical Communication currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Sichuan Huiyuan Optical Communication (1 is significant!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.