It's not a stretch to say that China Display Optoelectronics Technology Holdings Limited's (HKG:334) price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" for companies in the Tech industry in Hong Kong, where the median P/S ratio is around 0.5x. 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.
See our latest analysis for China Display Optoelectronics Technology Holdings
What Does China Display Optoelectronics Technology Holdings' Recent Performance Look Like?
As an illustration, revenue has deteriorated at China Display Optoelectronics Technology Holdings over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.
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 China Display Optoelectronics Technology Holdings' earnings, revenue and cash flow.Do Revenue Forecasts Match The P/S Ratio?
There's an inherent assumption that a company should be matching the industry for P/S ratios like China Display Optoelectronics Technology Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 39% decrease to the company's top line. As a result, revenue from three years ago have also fallen 28% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this in mind, we find it worrying that China Display Optoelectronics Technology Holdings' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On China Display Optoelectronics Technology Holdings' P/S
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
The fact that China Display Optoelectronics Technology Holdings currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for China Display Optoelectronics Technology Holdings that you should be aware of.
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.