Investor Optimism Abounds Sumavision Technologies Co.,Ltd. (SZSE:300079) But Growth Is Lacking

When close to half the companies in the Communications industry in China have price-to-sales ratios (or "P/S") below 3.9x, you may consider Sumavision Technologies Co.,Ltd. (SZSE:300079) as a stock to avoid entirely with its 10.3x 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.

Check out our latest analysis for Sumavision TechnologiesLtd

What Does Sumavision TechnologiesLtd's Recent Performance Look Like?

For example, consider that Sumavision TechnologiesLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Sumavision TechnologiesLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sumavision TechnologiesLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Sumavision TechnologiesLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 40% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 47% shows it's an unpleasant look.

With this information, we find it concerning that Sumavision TechnologiesLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sumavision TechnologiesLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 2 warning signs for Sumavision TechnologiesLtd that we have uncovered.

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.