Optimistic Investors Push Hangzhou Mdk Opto Electronics Co.,Ltd. (SHSE:688079) Shares Up 33% But Growth Is Lacking

Simply Wall St · 10/14 22:38

Hangzhou Mdk Opto Electronics Co.,Ltd. (SHSE:688079) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 35% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Hangzhou Mdk Opto ElectronicsLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.7x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Hangzhou Mdk Opto ElectronicsLtd

ps-multiple-vs-industry
SHSE:688079 Price to Sales Ratio vs Industry October 14th 2024

What Does Hangzhou Mdk Opto ElectronicsLtd's P/S Mean For Shareholders?

For instance, Hangzhou Mdk Opto ElectronicsLtd's 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hangzhou Mdk Opto ElectronicsLtd will help you shine a light on its historical performance.

How Is Hangzhou Mdk Opto ElectronicsLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hangzhou Mdk Opto ElectronicsLtd's to be considered reasonable.

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 3.1%. This means it has also seen a slide in revenue over the longer-term as revenue is down 15% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 27% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Hangzhou Mdk Opto ElectronicsLtd is trading at a P/S higher than the industry. 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 heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Hangzhou Mdk Opto ElectronicsLtd's P/S soaring as well. 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.

We've established that Hangzhou Mdk Opto ElectronicsLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Hangzhou Mdk Opto ElectronicsLtd (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

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).