Those holding Hangzhou CNCR-IT Co.,Ltd (SZSE:300250) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.
Since its price has surged higher, Hangzhou CNCR-ITLtd's price-to-sales (or "P/S") ratio of 11.1x might make it look like a strong sell right now compared to other companies in the Communications industry in China, where around half of the companies have P/S ratios below 4.7x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
SZSE:300250 Price to Sales Ratio vs Industry March 20th 2024
What Does Hangzhou CNCR-ITLtd's P/S Mean For Shareholders?
As an illustration, revenue has deteriorated at Hangzhou CNCR-ITLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou CNCR-ITLtd's earnings, revenue and cash flow.
Is There Enough Revenue Growth Forecasted For Hangzhou CNCR-ITLtd?
In order to justify its P/S ratio, Hangzhou CNCR-ITLtd would need to produce outstanding growth that's well in excess of the industry.
Retrospectively, the last year delivered a frustrating 34% decrease to the company's top line. As a result, revenue from three years ago have also fallen 25% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
In contrast to the company, the rest of the industry is expected to grow by 50% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this information, we find it concerning that Hangzhou CNCR-ITLtd is trading at a P/S higher than the industry. 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.
What We Can Learn From Hangzhou CNCR-ITLtd's P/S?
The strong share price surge has lead to Hangzhou CNCR-ITLtd's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Hangzhou CNCR-ITLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Hangzhou CNCR-ITLtd with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on Hangzhou CNCR-ITLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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