Talkweb Information System Co.,Ltd. (SZSE:002261) Soars 30% But It's A Story Of Risk Vs Reward

Those holding Talkweb Information System Co.,Ltd. (SZSE:002261) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 91%.

In spite of the firm bounce in price, it's still not a stretch to say that Talkweb Information SystemLtd's price-to-sales (or "P/S") ratio of 6.7x right now seems quite "middle-of-the-road" compared to the Entertainment industry in China, where the median P/S ratio is around 7.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Talkweb Information SystemLtd

How Talkweb Information SystemLtd Has Been Performing

With revenue growth that's exceedingly strong of late, Talkweb Information SystemLtd has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Talkweb Information SystemLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Talkweb Information SystemLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Talkweb Information SystemLtd would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 68% last year. The latest three year period has also seen an excellent 130% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Talkweb Information SystemLtd is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Talkweb Information SystemLtd's P/S Mean For Investors?

Talkweb Information SystemLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

To our surprise, Talkweb Information SystemLtd revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Talkweb Information SystemLtd (1 can't be ignored!) that you should be aware of.

If you're unsure about the strength of Talkweb Information SystemLtd'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.