There's Reason For Concern Over Yonyou Network Technology Co.,Ltd.'s (SHSE:600588) Price

There wouldn't be many who think Yonyou Network Technology Co.,Ltd.'s (SHSE:600588) price-to-sales (or "P/S") ratio of 3.9x is worth a mention when the median P/S for the Software industry in China is similar at about 4.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Yonyou Network TechnologyLtd

What Does Yonyou Network TechnologyLtd's Recent Performance Look Like?

Yonyou Network TechnologyLtd's revenue growth of late has been pretty similar to most other companies. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. Those who are bullish on Yonyou Network TechnologyLtd will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Yonyou Network TechnologyLtd.

Is There Some Revenue Growth Forecasted For Yonyou Network TechnologyLtd?

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

Retrospectively, the last year delivered a decent 5.8% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 15% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 15% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 24% per year, which is noticeably more attractive.

In light of this, it's curious that Yonyou Network TechnologyLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Yonyou Network TechnologyLtd'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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Yonyou Network TechnologyLtd with six simple checks will allow you to discover any risks that could be an issue.

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.