Optoelectronics Co., Ltd.'s (TSE:6664) 32% Share Price Surge Not Quite Adding Up

Optoelectronics Co., Ltd. (TSE:6664) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Optoelectronics' price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Japan's Electronic industry is similar at about 0.7x. 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.

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Check out our latest analysis for Optoelectronics

What Does Optoelectronics' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Optoelectronics, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies 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 Optoelectronics, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Optoelectronics' Revenue Growth Trending?

Optoelectronics' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 5.3% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 8.3% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 6.3% shows it's an unpleasant look.

With this in mind, we find it worrying that Optoelectronics' P/S exceeds that of its industry peers. 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 Final Word

Its shares have lifted substantially and now Optoelectronics' P/S is back within range of the industry median. 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.

Our look at Optoelectronics revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set 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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Optoelectronics you should be aware of, and 2 of them are potentially serious.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.