Suzhou Everbright Photonics Co., Ltd. (SHSE:688048) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 57% loss during that time.

Even after such a large drop in price, Suzhou Everbright Photonics' price-to-sales (or "P/S") ratio of 22.5x might still make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 5.6x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Suzhou Everbright Photonics Has Been Performing

Suzhou Everbright Photonics could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Suzhou Everbright Photonics' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 18% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 47% during the coming year according to the six analysts following the company. With the industry only predicted to deliver 34%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Suzhou Everbright Photonics' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

A significant share price dive has done very little to deflate Suzhou Everbright Photonics' very lofty P/S. 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 look into Suzhou Everbright Photonics shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Suzhou Everbright Photonics is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

If you're unsure about the strength of Suzhou Everbright Photonics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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