Pinning Down Jiangsu Rijiu Optoelectronics Jointstock Co., Ltd's (SZSE:003015) P/S Is Difficult Right Now

With a price-to-sales (or "P/S") ratio of 6.7x Jiangsu Rijiu Optoelectronics Jointstock Co., Ltd (SZSE:003015) may be sending bearish signals at the moment, given that almost half of all Electronic companies in China have P/S ratios under 4.7x and even P/S lower than 2x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangsu Rijiu Optoelectronics

What Does Jiangsu Rijiu Optoelectronics' Recent Performance Look Like?

Jiangsu Rijiu Optoelectronics has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Jiangsu Rijiu Optoelectronics would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. As a result, it also grew revenue by 18% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Jiangsu Rijiu Optoelectronics' P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 We Can Learn From Jiangsu Rijiu Optoelectronics' P/S?

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 examination of Jiangsu Rijiu Optoelectronics 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. 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It is also worth noting that we have found 4 warning signs for Jiangsu Rijiu Optoelectronics (1 doesn't sit too well with us!) that you need to take into consideration.

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.