There's No Escaping Pony Testing Co., Ltd.'s (SZSE:300887) Muted Revenues Despite A 26% Share Price Rise

Pony Testing Co., Ltd. (SZSE:300887) shares have continued their recent momentum with a 26% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

Although its price has surged higher, Pony Testing's price-to-sales (or "P/S") ratio of 2.8x might still make it look like a buy right now compared to the Professional Services industry in China, where around half of the companies have P/S ratios above 3.9x and even P/S above 9x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Pony Testing

How Pony Testing Has Been Performing

Pony Testing hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pony Testing.

How Is Pony Testing's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Pony Testing's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 23% as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 28%, which is noticeably more attractive.

In light of this, it's understandable that Pony Testing's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift Pony Testing's P/S close to the industry median. 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.

As we suspected, our examination of Pony Testing's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

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

If you're unsure about the strength of Pony Testing'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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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.