Sprocomm Intelligence Limited (HKG:1401) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance.    Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 305% in the last year.  

Although its price has dipped substantially, given close to half the companies operating in Hong Kong's Tech industry have price-to-sales ratios (or "P/S") below 0.6x, you may still consider Sprocomm Intelligence as a stock to potentially avoid with its 1.7x 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.  

View our latest analysis for Sprocomm Intelligence

SEHK:1401 Price to Sales Ratio vs Industry December 31st 2023

What Does Sprocomm Intelligence's P/S Mean For Shareholders?

For example, consider that Sprocomm Intelligence's financial performance has been poor lately as its revenue has been in decline.   One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future.  However, if this isn't the case, investors might get caught out paying too much for the stock.    

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 Sprocomm Intelligence's earnings, revenue and cash flow.  

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

Sprocomm Intelligence's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.  

Retrospectively, the last year delivered a frustrating 33% decrease to the company's top line.   As a result, revenue from three years ago have also fallen 53% overall.  Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.  

Comparing that to the industry, which is predicted to deliver 13% 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 Sprocomm Intelligence'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 Bottom Line On Sprocomm Intelligence's P/S

There's still some elevation in Sprocomm Intelligence's P/S, even if the same can't be said for its share price recently.      Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Sprocomm Intelligence currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term.  When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability.  Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Sprocomm Intelligence (2 can't be ignored!) that you need to be mindful of.  

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.