Beijing Watertek Information Technology Co., Ltd. (SZSE:300324) Surges 42% Yet Its Low P/S Is No Reason For Excitement

Those holding Beijing Watertek Information Technology Co., Ltd. (SZSE:300324) shares would be relieved that the share price has rebounded 42% 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 12% in the last twelve months.

Although its price has surged higher, Beijing Watertek Information Technology may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.9x, considering almost half of all companies in the Aerospace & Defense industry in China have P/S ratios greater than 7.3x and even P/S higher than 12x 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 reduced P/S.

View our latest analysis for Beijing Watertek Information Technology

What Does Beijing Watertek Information Technology's Recent Performance Look Like?

For example, consider that Beijing Watertek Information Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Beijing Watertek Information Technology will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Beijing Watertek Information Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Beijing Watertek Information Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Beijing Watertek Information Technology would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.0%. As a result, revenue from three years ago have also fallen 7.8% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 48% shows it's an unpleasant look.

With this information, we are not surprised that Beijing Watertek Information Technology is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Beijing Watertek Information Technology's P/S?

Shares in Beijing Watertek Information Technology have risen appreciably however, its P/S is still subdued. 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.

As we suspected, our examination of Beijing Watertek Information Technology revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Beijing Watertek Information Technology that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.