Investors Appear Satisfied With Hangzhou Electronic Soul Network Technology Co., Ltd.'s (SHSE:603258) Prospects As Shares Rocket 26%

Hangzhou Electronic Soul Network Technology Co., Ltd. (SHSE:603258) 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 15% in the last twelve months.

Since its price has surged higher, given close to half the companies operating in China's Entertainment industry have price-to-sales ratios (or "P/S") below 7.2x, you may consider Hangzhou Electronic Soul Network Technology as a stock to potentially avoid with its 9.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Hangzhou Electronic Soul Network Technology

How Hangzhou Electronic Soul Network Technology Has Been Performing

While the industry has experienced revenue growth lately, Hangzhou Electronic Soul Network Technology's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Hangzhou Electronic Soul Network Technology will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Hangzhou Electronic Soul Network Technology's is when the company's growth is on track to outshine 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 14%. As a result, revenue from three years ago have also fallen 44% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 38% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 33%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Hangzhou Electronic Soul Network Technology's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Hangzhou Electronic Soul Network Technology's P/S Mean For Investors?

Hangzhou Electronic Soul Network Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look into Hangzhou Electronic Soul Network Technology shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Hangzhou Electronic Soul Network Technology that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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.