Subdued Growth No Barrier To G-TECH Optoelectronics Corporation (TWSE:3149) With Shares Advancing 37%

G-TECH Optoelectronics Corporation (TWSE:3149) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 37%.

Following the firm bounce in price, you could be forgiven for thinking G-TECH Optoelectronics is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.9x, considering almost half the companies in Taiwan's Electronic industry have P/S ratios below 1.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for G-TECH Optoelectronics

What Does G-TECH Optoelectronics' Recent Performance Look Like?

For instance, G-TECH Optoelectronics' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 G-TECH Optoelectronics' earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, G-TECH Optoelectronics would need to produce impressive growth in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.2%. The last three years don't look nice either as the company has shrunk revenue by 26% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

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

What We Can Learn From G-TECH Optoelectronics' P/S?

The large bounce in G-TECH Optoelectronics' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of G-TECH Optoelectronics revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for G-TECH Optoelectronics (of which 2 shouldn't be ignored!) you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.