There's Reason For Concern Over Offcn Education Technology Co., Ltd.'s (SZSE:002607) Massive 33% Price Jump

Despite an already strong run, Offcn Education Technology Co., Ltd. (SZSE:002607) shares have been powering on, with a gain of 33% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

After such a large jump in price, given close to half the companies operating in China's Consumer Services industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Offcn Education Technology as a stock to potentially avoid with its 5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Offcn Education Technology

What Does Offcn Education Technology's Recent Performance Look Like?

Recent times haven't been great for Offcn Education Technology as its revenue has been falling quicker than most other companies. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

Offcn Education Technology's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 79% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 31% as estimated by the three analysts watching the company. With the industry predicted to deliver 36% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Offcn Education Technology's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in Offcn Education Technology's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Offcn Education Technology, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Offcn Education Technology that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.