Ruihe Data Technology Holdings Limited (HKG:3680) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 117% in the last year.

After such a large jump in price, you could be forgiven for thinking Ruihe Data Technology Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in Hong Kong's IT industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Ruihe Data Technology Holdings' P/S Mean For Shareholders?

For instance, Ruihe Data Technology Holdings' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Ruihe Data Technology Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, Ruihe Data Technology Holdings would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 8.5% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 10% shows it's noticeably less attractive.

With this information, we find it concerning that Ruihe Data Technology Holdings 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Ruihe Data Technology Holdings' P/S

The strong share price surge has lead to Ruihe Data Technology Holdings' P/S soaring as well. 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.

The fact that Ruihe Data Technology Holdings currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 2 warning signs for Ruihe Data Technology Holdings (1 is concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Ruihe Data Technology Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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