Jiangsu Eazytec Co., Ltd.'s (SHSE:688258) Popularity With Investors Is Under Threat From Overpricing
With a price-to-sales (or "P/S") ratio of 11.3x Jiangsu Eazytec Co., Ltd. (SHSE:688258) may be sending very bearish signals at the moment, given that almost half of all the IT companies in China have P/S ratios under 4x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Jiangsu Eazytec
How Jiangsu Eazytec Has Been Performing
For example, consider that Jiangsu Eazytec's financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Although there are no analyst estimates available for Jiangsu Eazytec, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
Jiangsu Eazytec's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Although pleasingly revenue has lifted 42% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 17% shows it's noticeably less attractive.
With this information, we find it concerning that Jiangsu Eazytec is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
The Bottom Line On Jiangsu Eazytec's P/S
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.
The fact that Jiangsu Eazytec currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.
Before you settle on your opinion, we've discovered 4 warning signs for Jiangsu Eazytec (1 is potentially serious!) that you should be aware of.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
About SHSE:688258
Jiangsu Eazytec
Develops cloud computing equipment core firmware products in China.
Excellent balance sheet slight.