There's Reason For Concern Over Perfect Optronics Limited's (HKG:8311) Massive 158% Price Jump

The Perfect Optronics Limited (HKG:8311) share price has done very well over the last month, posting an excellent gain of 158%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.8% over the last year.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Electronic industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Perfect Optronics as a stock probably not worth researching with its 1.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Perfect Optronics

How Perfect Optronics Has Been Performing

As an illustration, revenue has deteriorated at Perfect Optronics over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Perfect Optronics, 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 High P/S Ratio?

Perfect Optronics' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 66%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 7.1% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 13% 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 Perfect Optronics is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Perfect Optronics' P/S?

The large bounce in Perfect Optronics' shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Perfect Optronics revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

Before you take the next step, you should know about the 2 warning signs for Perfect Optronics (1 doesn't sit too well with us!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.