Fujian Foxit Software Development Joint Stock Co., Ltd.'s (SHSE:688095) Shares Climb 27% But Its Business Is Yet to Catch Up

Despite an already strong run, Fujian Foxit Software Development Joint Stock Co., Ltd. (SHSE:688095) shares have been powering on, with a gain of 27% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 3.2% isn't as impressive.

Since its price has surged higher, you could be forgiven for thinking Fujian Foxit Software Development is a stock not worth researching with a price-to-sales ratios (or "P/S") of 11.4x, considering almost half the companies in China's Software industry have P/S ratios below 7.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Fujian Foxit Software Development

What Does Fujian Foxit Software Development's Recent Performance Look Like?

Recent times have been advantageous for Fujian Foxit Software Development as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fujian Foxit Software Development.

How Is Fujian Foxit Software Development's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Fujian Foxit Software Development's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Revenue has also lifted 29% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 17% during the coming year according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 33%, which is noticeably more attractive.

With this information, we find it concerning that Fujian Foxit Software Development is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Fujian Foxit Software Development's P/S is on the rise since its shares have risen strongly. 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 concluded that Fujian Foxit Software Development currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Fujian Foxit Software Development, and understanding them should be part of your investment process.

If you're unsure about the strength of Fujian Foxit Software Development'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.