After Leaping 26% Koal Software Co., Ltd. (SHSE:603232) Shares Are Not Flying Under The Radar

Koal Software Co., Ltd. (SHSE:603232) shares have continued their recent momentum with a 26% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 5.4% isn't as impressive.

Following the firm bounce in price, you could be forgiven for thinking Koal Software is a stock not worth researching with a price-to-sales ratios (or "P/S") of 6.9x, considering almost half the companies in China's Software industry have P/S ratios below 5.2x. 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 Koal Software

How Koal Software Has Been Performing

Koal Software hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Koal Software?

In order to justify its P/S ratio, Koal Software would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 8.4% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 16% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 39% over the next year. With the industry only predicted to deliver 35%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Koal Software'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 Koal Software's P/S Mean For Investors?

The large bounce in Koal Software's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Koal Software maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about these 3 warning signs we've spotted with Koal Software (including 1 which is potentially serious).

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.