Subdued Growth No Barrier To Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd. (SZSE:301421) With Shares Advancing 25%

Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd. (SZSE:301421) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, you could be forgiven for thinking Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.7x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.7x. 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 Nanjing Wavelength Opto-Electronic Science & TechnologyLtd

What Does Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's P/S Mean For Shareholders?

Nanjing Wavelength Opto-Electronic Science & TechnologyLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nanjing Wavelength Opto-Electronic Science & TechnologyLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Nanjing Wavelength Opto-Electronic Science & TechnologyLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.8% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 43% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's P/S

The strong share price surge has lead to Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's P/S soaring as well. 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.

The fact that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

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.