Sanan Optoelectronics Co.,Ltd's (SHSE:600703) price-to-sales (or "P/S") ratio of 4x might make it look like a buy right now compared to the Semiconductor industry in China, where around half of the companies have P/S ratios above 5.8x and even P/S above 10x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Sanan OptoelectronicsLtd's Recent Performance Look Like?

Sanan OptoelectronicsLtd's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

How Is Sanan OptoelectronicsLtd's Revenue Growth Trending?

Sanan OptoelectronicsLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 55% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 22% as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 36%, which is noticeably more attractive.

With this information, we can see why Sanan OptoelectronicsLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Sanan OptoelectronicsLtd's 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.

We've established that Sanan OptoelectronicsLtd maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Sanan OptoelectronicsLtd has 2 warning signs we think you should be aware of.

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.

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