Yes Optoelectronics (Group) Co., Ltd.'s (SZSE:002952) 33% Share Price Surge Not Quite Adding Up

Despite an already strong run, Yes Optoelectronics (Group) Co., Ltd. (SZSE:002952) shares have been powering on, with a gain of 33% in the last thirty days. The annual gain comes to 135% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given around half the companies in China's Tech industry have price-to-sales ratios (or "P/S") below 3.6x, you may consider Yes Optoelectronics (Group) as a stock to avoid entirely with its 8.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Yes Optoelectronics (Group)

How Yes Optoelectronics (Group) Has Been Performing

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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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 1.8%. Even so, admirably revenue has lifted 76% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 26% shows it's noticeably less attractive.

With this in mind, we find it worrying that Yes Optoelectronics (Group)'s P/S exceeds that of its industry peers. 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. 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.

Our examination of Yes Optoelectronics (Group) revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You need to take note of risks, for example - Yes Optoelectronics (Group) has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

If these risks are making you reconsider your opinion on Yes Optoelectronics (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.