Investor Optimism Abounds Synthesis Electronic Technology Co.,Ltd. (SZSE:300479) But Growth Is Lacking

When you see that almost half of the companies in the Electronic industry in China have price-to-sales ratios (or "P/S") below 3.7x, Synthesis Electronic Technology Co.,Ltd. (SZSE:300479) looks to be giving off strong sell signals with its 10.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Synthesis Electronic TechnologyLtd

What Does Synthesis Electronic TechnologyLtd's P/S Mean For Shareholders?

For instance, Synthesis Electronic TechnologyLtd's receding revenue in recent times would have to be some food for thought. 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. 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 Synthesis Electronic TechnologyLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Synthesis Electronic TechnologyLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Synthesis Electronic TechnologyLtd'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 8.8%. As a result, revenue from three years ago have also fallen 17% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 61% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Synthesis Electronic TechnologyLtd 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 Bottom Line On Synthesis Electronic TechnologyLtd's P/S

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.

Our examination of Synthesis Electronic TechnologyLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Synthesis Electronic TechnologyLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.