Optimistic Investors Push Yes Optoelectronics (Group) Co., Ltd. (SZSE:002952) Shares Up 30% But Growth Is Lacking

Despite an already strong run, Yes Optoelectronics (Group) Co., Ltd. (SZSE:002952) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 73% in the last year.

After such a large jump in price, you could be forgiven for thinking Yes Optoelectronics (Group) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.1x, considering almost half the companies in China's Tech 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 Yes Optoelectronics (Group)

What Does Yes Optoelectronics (Group)'s Recent Performance Look Like?

For example, consider that Yes Optoelectronics (Group)'s financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Yes Optoelectronics (Group) will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Yes Optoelectronics (Group)?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Yes Optoelectronics (Group)'s to be considered reasonable.

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 19%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 19% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Yes Optoelectronics (Group) is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 recent growth rates.

What Does Yes Optoelectronics (Group)'s P/S Mean For Investors?

Shares in Yes Optoelectronics (Group) have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Yes Optoelectronics (Group) 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Yes Optoelectronics (Group) (2 are significant) you should be aware of.

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.