What Wuhan Guide Infrared Co., Ltd.'s (SZSE:002414) 30% Share Price Gain Is Not Telling You

Those holding Wuhan Guide Infrared Co., Ltd. (SZSE:002414) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 32% over that time.

After such a large jump in price, you could be forgiven for thinking Wuhan Guide Infrared is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11.2x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Wuhan Guide Infrared

What Does Wuhan Guide Infrared's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Wuhan Guide Infrared's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Wuhan Guide Infrared will help you uncover what's on the horizon.

How Is Wuhan Guide Infrared's Revenue Growth Trending?

In order to justify its P/S ratio, Wuhan Guide Infrared would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 13% 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 3.8% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 23% during the coming year according to the dual analysts following the company. With the industry predicted to deliver 25% growth , the company is positioned for a comparable revenue result.

With this information, we find it interesting that Wuhan Guide Infrared is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Wuhan Guide Infrared's P/S

The strong share price surge has lead to Wuhan Guide Infrared's P/S soaring as well. 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.

Analysts are forecasting Wuhan Guide Infrared's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Wuhan Guide Infrared (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.