What Xi'an Xice Testing Technology Co., Ltd.'s (SZSE:301306) P/S Is Not Telling You

Xi'an Xice Testing Technology Co., Ltd.'s (SZSE:301306) price-to-sales (or "P/S") ratio of 8.4x may look like a poor investment opportunity when you consider close to half the companies in the Professional Services industry in China have P/S ratios below 2.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Xi'an Xice Testing Technology

What Does Xi'an Xice Testing Technology's P/S Mean For Shareholders?

Revenue has risen firmly for Xi'an Xice Testing Technology recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Xi'an Xice Testing Technology's earnings, revenue and cash flow.

How Is Xi'an Xice Testing Technology's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The latest three year period has also seen an excellent 56% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 94% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Xi'an Xice Testing Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

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 Xi'an Xice Testing Technology 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Xi'an Xice Testing Technology is showing 3 warning signs in our investment analysis, and 2 of those are concerning.

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.

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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.