Revenues Not Telling The Story For Hangzhou Prevail Optoelectronic Equipment Co., Ltd. (SZSE:300710) After Shares Rise 33%

The Hangzhou Prevail Optoelectronic Equipment Co., Ltd. (SZSE:300710) share price has done very well over the last month, posting an excellent gain of 33%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Hangzhou Prevail Optoelectronic Equipment's P/S ratio of 5.9x, since the median price-to-sales (or "P/S") ratio for the Communications industry in China is also close to 5.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Hangzhou Prevail Optoelectronic Equipment

What Does Hangzhou Prevail Optoelectronic Equipment's P/S Mean For Shareholders?

It looks like revenue growth has deserted Hangzhou Prevail Optoelectronic Equipment recently, which is not something to boast about. It might be that many expect the uninspiring revenue performance to only match most other companies at best over the coming period, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't 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.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Hangzhou Prevail Optoelectronic Equipment would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 43% drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 40% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Hangzhou Prevail Optoelectronic Equipment is trading at a fairly similar P/S compared to the industry. 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.

What Does Hangzhou Prevail Optoelectronic Equipment's P/S Mean For Investors?

Hangzhou Prevail Optoelectronic Equipment's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future 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. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. 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.

It is also worth noting that we have found 3 warning signs for Hangzhou Prevail Optoelectronic Equipment (1 is potentially serious!) that you need to take into consideration.

If you're unsure about the strength of Hangzhou Prevail Optoelectronic Equipment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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