China Display Optoelectronics Technology Holdings Limited (HKG:334) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness.    Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 45% over that time.  

In spite of the firm bounce in price, there still wouldn't be many who think China Display Optoelectronics Technology Holdings' price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Hong Kong's Tech industry is similar at about 0.3x.  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.    

SEHK:334 Price to Sales Ratio vs Industry March 18th 2024

What Does China Display Optoelectronics Technology Holdings' P/S Mean For Shareholders?

For example, consider that China Display Optoelectronics Technology Holdings' financial performance has been poor lately as its revenue has been in decline.   It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling.  If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.    

Although there are no analyst estimates available for China Display Optoelectronics Technology Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.  

How Is China Display Optoelectronics Technology Holdings' Revenue Growth Trending?  

In order to justify its P/S ratio, China Display Optoelectronics Technology Holdings would need to produce growth that's similar to 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 39%.   As a result, revenue from three years ago have also fallen 28% overall.  Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.  

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that China Display Optoelectronics Technology Holdings' P/S sits in line with the majority of other companies.  It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects.  There's a 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 Does China Display Optoelectronics Technology Holdings' P/S Mean For Investors?

China Display Optoelectronics Technology Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry      Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a 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.  Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long.  Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for China Display Optoelectronics Technology Holdings that you need to be mindful 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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