Dark Horse Technology Group Co., Ltd.'s (SZSE:300688) Shares Climb 35% But Its Business Is Yet to Catch Up

Dark Horse Technology Group Co., Ltd. (SZSE:300688) shareholders have had their patience rewarded with a 35% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

After such a large jump in price, Dark Horse Technology Group may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 22.2x, since almost half of all companies in the Professional Services industry in China have P/S ratios under 3.5x and even P/S lower than 1.5x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Dark Horse Technology Group

What Does Dark Horse Technology Group's Recent Performance Look Like?

Dark Horse Technology Group has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Dark Horse Technology Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Dark Horse Technology Group?

Dark Horse Technology Group'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.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Dark Horse Technology Group is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Dark Horse Technology Group's P/S?

The strong share price surge has lead to Dark Horse Technology Group'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.

The fact that Dark Horse Technology Group 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Dark Horse Technology Group (of which 1 is a bit unpleasant!) you should know about.

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

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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.