Talkweb Information System Co.,Ltd.'s (SZSE:002261) Shares Climb 26% But Its Business Is Yet to Catch Up

Talkweb Information System Co.,Ltd. (SZSE:002261) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 44%.

In spite of the firm bounce in price, there still wouldn't be many who think Talkweb Information SystemLtd's price-to-sales (or "P/S") ratio of 7.8x is worth a mention when the median P/S in China's Entertainment industry is similar at about 7.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Talkweb Information SystemLtd

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

Recent times have been advantageous for Talkweb Information SystemLtd as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Talkweb Information SystemLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Talkweb Information SystemLtd?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Talkweb Information SystemLtd's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 68% last year. Pleasingly, revenue has also lifted 130% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 7.7% over the next year. That's shaping up to be materially lower than the 32% growth forecast for the broader industry.

With this in mind, we find it intriguing that Talkweb Information SystemLtd's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Talkweb Information SystemLtd's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that Talkweb Information SystemLtd's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Talkweb Information SystemLtd that you need to be mindful of.

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.