Beijing Fjr Optoelectronic Technology Co., Ltd. (SHSE:688272) shareholders have had their patience rewarded with a 43% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.4% in the last twelve months.

After such a large jump in price, given close to half the companies operating in China's Electronic industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Beijing Fjr Optoelectronic Technology as a stock to potentially avoid with its 5.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Beijing Fjr Optoelectronic Technology's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Beijing Fjr Optoelectronic Technology has been doing very well. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Beijing Fjr Optoelectronic Technology's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 101% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 30% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 26% 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 alarming that Beijing Fjr Optoelectronic Technology's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

Beijing Fjr Optoelectronic Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Beijing Fjr Optoelectronic Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

Having said that, be aware Beijing Fjr Optoelectronic Technology is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Beijing Fjr Optoelectronic Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.