Wuhan Guide Infrared Co., Ltd.'s (SZSE:002414) Earnings Haven't Escaped The Attention Of Investors

Wuhan Guide Infrared Co., Ltd.'s (SZSE:002414) price-to-sales (or "P/S") ratio of 10.9x may look like a poor investment opportunity when you consider close to half the companies in the Electronic industry in China have P/S ratios below 3.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Wuhan Guide Infrared

How Wuhan Guide Infrared Has Been Performing

Wuhan Guide Infrared certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Wuhan Guide Infrared's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Wuhan Guide Infrared's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Wuhan Guide Infrared's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 9.4%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 31% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 34% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 25%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Wuhan Guide Infrared's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Wuhan Guide Infrared's P/S Mean For Investors?

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.

Our look into Wuhan Guide Infrared shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Wuhan Guide Infrared, and understanding these should be part of your investment process.

If you're unsure about the strength of Wuhan Guide Infrared's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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