The Kingdee International Software Group Company Limited (HKG:268) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

Although its price has dipped substantially, you could still be forgiven for thinking Kingdee International Software Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.2x, considering almost half the companies in Hong Kong's Software industry have P/S ratios below 1.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Kingdee International Software Group Performed Recently?

With revenue growth that's superior to most other companies of late, Kingdee International Software Group has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Kingdee International Software Group would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Pleasingly, revenue has also lifted 69% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 18% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 19% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Kingdee International Software Group's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

Even after such a strong price drop, Kingdee International Software Group's P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Analysts are forecasting Kingdee International Software Group's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

You always need to take note of risks, for example - Kingdee International Software Group has 1 warning sign we think you should be aware 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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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.