Shenzhen Tianyuan DIC Information Technology Co., Ltd. (SZSE:300047) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

Even after such a large drop in price, Shenzhen Tianyuan DIC Information Technology's price-to-sales (or "P/S") ratio of 0.6x might still make it look like a strong buy right now compared to the wider Software industry in China, where around half of the companies have P/S ratios above 4.5x and even P/S above 8x 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 limited.

How Has Shenzhen Tianyuan DIC Information Technology Performed Recently?

Shenzhen Tianyuan DIC Information Technology has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Shenzhen Tianyuan DIC Information Technology would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. As a result, it also grew revenue by 25% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 28% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Shenzhen Tianyuan DIC Information Technology is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does Shenzhen Tianyuan DIC Information Technology's P/S Mean For Investors?

Shares in Shenzhen Tianyuan DIC Information Technology have plummeted and its P/S has followed suit. 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.

In line with expectations, Shenzhen Tianyuan DIC Information Technology maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Tianyuan DIC Information Technology, and understanding these should be part of your investment process.

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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