Some Confidence Is Lacking In Anhui Landun Photoelectron Co., Ltd.'s (SZSE:300862) P/S

When you see that almost half of the companies in the Electronic industry in China have price-to-sales ratios (or "P/S") below 3.6x, Anhui Landun Photoelectron Co., Ltd. (SZSE:300862) looks to be giving off strong sell signals with its 7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Anhui Landun Photoelectron

What Does Anhui Landun Photoelectron's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Anhui Landun Photoelectron over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Anhui Landun Photoelectron's earnings, revenue and cash flow.

How Is Anhui Landun Photoelectron's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Anhui Landun Photoelectron's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's top line. As a result, revenue from three years ago have also fallen 10% overall. 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 26% shows it's an unpleasant look.

With this in mind, we find it worrying that Anhui Landun Photoelectron's P/S exceeds that of its industry peers. 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

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Anhui Landun Photoelectron currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 4 warning signs for Anhui Landun Photoelectron (2 are a bit concerning!) that you need to take into consideration.

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.