Why Investors Shouldn't Be Surprised By OFILM Group Co., Ltd.'s (SZSE:002456) 26% Share Price Plunge

OFILM Group Co., Ltd. (SZSE:002456) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 58%, which is great even in a bull market.

In spite of the heavy fall in price, OFILM Group may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.2x, considering almost half of all companies in the Electronic industry in China have P/S ratios greater than 4.6x and even P/S higher than 9x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for OFILM Group

How Has OFILM Group Performed Recently?

With revenue growth that's superior to most other companies of late, OFILM Group has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on OFILM Group.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, OFILM Group would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an exceptional 38% gain to the company's top line. Still, revenue has fallen 28% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 22% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 27% growth forecast for the broader industry.

In light of this, it's understandable that OFILM Group's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On OFILM Group's P/S

Shares in OFILM Group have plummeted and its P/S has followed suit. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of OFILM Group's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - OFILM Group has 3 warning signs (and 1 which is concerning) we think you should know about.

If these risks are making you reconsider your opinion on OFILM Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.