Hangzhou Hopechart IoT Technology Co.,Ltd's (SHSE:688288) Shares Bounce 48% But Its Business Still Trails The Industry

Hangzhou Hopechart IoT Technology Co.,Ltd (SHSE:688288) shares have had a really impressive month, gaining 48% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

In spite of the firm bounce in price, Hangzhou Hopechart IoT TechnologyLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 3.7x, considering almost half of all companies in the Software industry in China have P/S ratios greater than 5.8x and even P/S higher than 11x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Hangzhou Hopechart IoT TechnologyLtd

How Has Hangzhou Hopechart IoT TechnologyLtd Performed Recently?

With revenue growth that's exceedingly strong of late, Hangzhou Hopechart IoT TechnologyLtd has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hangzhou Hopechart IoT TechnologyLtd will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/S as low as Hangzhou Hopechart IoT TechnologyLtd's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 66%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 5.3% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Hangzhou Hopechart IoT TechnologyLtd's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Hangzhou Hopechart IoT TechnologyLtd's P/S

The latest share price surge wasn't enough to lift Hangzhou Hopechart IoT TechnologyLtd's P/S close to the industry median. 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.

As we suspected, our examination of Hangzhou Hopechart IoT TechnologyLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hangzhou Hopechart IoT TechnologyLtd (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.