Investors Give Erayak Power Solution Group Inc. (NASDAQ:RAYA) Shares A 38% Hiding

Unfortunately for some shareholders, the Erayak Power Solution Group Inc. (NASDAQ:RAYA) share price has dived 38% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 94% loss during that time.

Since its price has dipped substantially, Erayak Power Solution Group's price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Electrical industry in the United States, where around half of the companies have P/S ratios above 1.8x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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Check out our latest analysis for Erayak Power Solution Group

How Has Erayak Power Solution Group Performed Recently?

With revenue growth that's exceedingly strong of late, Erayak Power Solution Group has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. 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 out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Erayak Power Solution Group will help you shine a light on its historical performance.

How Is Erayak Power Solution Group's Revenue Growth Trending?

In order to justify its P/S ratio, Erayak Power Solution Group would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 49% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 63% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Erayak Power Solution Group's P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Erayak Power Solution Group's P/S?

The southerly movements of Erayak Power Solution Group's shares means its P/S is now sitting at a pretty low level. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We're very surprised to see Erayak Power Solution Group currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Erayak Power Solution Group, and understanding them should be part of your investment process.

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.

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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.