Servyou Software Group Co., Ltd.'s (SHSE:603171) Shares Climb 30% But Its Business Is Yet to Catch Up

Despite an already strong run, Servyou Software Group Co., Ltd. (SHSE:603171) shares have been powering on, with a gain of 30% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 7.3% isn't as attractive.

Even after such a large jump in price, it's still not a stretch to say that Servyou Software Group's price-to-sales (or "P/S") ratio of 7.5x right now seems quite "middle-of-the-road" compared to the Software industry in China, where the median P/S ratio is around 7.9x. 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 Servyou Software Group

How Servyou Software Group Has Been Performing

With revenue growth that's superior to most other companies of late, Servyou Software Group has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on Servyou Software Group will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Servyou Software Group would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 5.7% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 23% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 24% over the next year. Meanwhile, the rest of the industry is forecast to expand by 33%, which is noticeably more attractive.

In light of this, it's curious that Servyou Software Group's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Servyou Software Group's P/S?

Its shares have lifted substantially and now Servyou Software Group's P/S is back within range of the industry median. 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 at the analysts forecasts of Servyou Software Group's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you take the next step, you should know about the 1 warning sign for Servyou Software Group that we have uncovered.

If you're unsure about the strength of Servyou Software Group'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.