Those holding Fujian Foxit Software Development Joint Stock Co., Ltd. (SHSE:688095) shares would be relieved that the share price has rebounded 36% 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 25% in the last twelve months.
Following the firm bounce in price, given around half the companies in China's Software industry have price-to-sales ratios (or "P/S") below 5.1x, you may consider Fujian Foxit Software Development as a stock to avoid entirely with its 9.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
SHSE:688095 Price to Sales Ratio vs Industry March 31st 2024
How Fujian Foxit Software Development Has Been Performing
Fujian Foxit Software Development's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fujian Foxit Software Development.
What Are Revenue Growth Metrics Telling Us About The High P/S?
Fujian Foxit Software Development's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
If we review the last year of revenue growth, the company posted a worthy increase of 5.6%. This was backed up an excellent period prior to see revenue up by 31% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next year should generate growth of 18% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 31%, which is noticeably more attractive.
With this information, we find it concerning that Fujian Foxit Software Development is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.
The Key Takeaway
The strong share price surge has lead to Fujian Foxit Software Development'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.
Despite analysts forecasting some poorer-than-industry revenue growth figures for Fujian Foxit Software Development, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Fujian Foxit Software Development has 1 warning sign we think you should be aware of.
If you're unsure about the strength of Fujian Foxit Software Development's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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