Hangzhou Prevail Optoelectronic Equipment Co., Ltd.'s (SZSE:300710) 31% Share Price Surge Not Quite Adding Up

Hangzhou Prevail Optoelectronic Equipment Co., Ltd. (SZSE:300710) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

In spite of the firm bounce in price, there still wouldn't be many who think Hangzhou Prevail Optoelectronic Equipment's price-to-sales (or "P/S") ratio of 5x is worth a mention when the median P/S in China's Communications industry is similar at about 4.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Hangzhou Prevail Optoelectronic Equipment

How Has Hangzhou Prevail Optoelectronic Equipment Performed Recently?

As an illustration, revenue has deteriorated at Hangzhou Prevail Optoelectronic Equipment over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Hangzhou Prevail Optoelectronic Equipment?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hangzhou Prevail Optoelectronic Equipment'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 43%. As a result, revenue from three years ago have also fallen 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 52% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Hangzhou Prevail Optoelectronic Equipment's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Bottom Line On Hangzhou Prevail Optoelectronic Equipment's P/S

Its shares have lifted substantially and now Hangzhou Prevail Optoelectronic Equipment's P/S is back within range of the industry median. 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.

We find it unexpected that Hangzhou Prevail Optoelectronic Equipment trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hangzhou Prevail Optoelectronic Equipment that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.