Wondershare Technology Group Co., Ltd. (SZSE:300624) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 11% in that time.

Although its price has dipped substantially, Wondershare Technology Group may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 7.5x, when you consider almost half of the companies in the Software industry in China have P/S ratios under 4.5x and even P/S lower than 2x aren't out of the ordinary. 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 Wondershare Technology Group's P/S Mean For Shareholders?

Recent times have been advantageous for Wondershare Technology Group as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Wondershare Technology Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. The latest three year period has also seen an excellent 58% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 28% as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 28%, which is not materially different.

With this in consideration, we find it intriguing that Wondershare Technology Group's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Bottom Line On Wondershare Technology Group's P/S

A significant share price dive has done very little to deflate Wondershare Technology Group's very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Wondershare Technology Group currently trades on a higher than expected P/S. 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.

Having said that, be aware Wondershare Technology Group is showing 3 warning signs in our investment analysis, you should know about.

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

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