Why We're Not Concerned Yet About Shenzhen Intellifusion Technologies Co., Ltd.'s (SHSE:688343) 31% Share Price Plunge

Shenzhen Intellifusion Technologies Co., Ltd. (SHSE:688343) shares have retraced a considerable 31% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 45%, which is great even in a bull market.

Although its price has dipped substantially, when almost half of the companies in China's Software industry have price-to-sales ratios (or "P/S") below 7.2x, you may still consider Shenzhen Intellifusion Technologies as a stock not worth researching with its 21.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Shenzhen Intellifusion Technologies

What Does Shenzhen Intellifusion Technologies' P/S Mean For Shareholders?

Shenzhen Intellifusion Technologies certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Intellifusion Technologies.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shenzhen Intellifusion Technologies' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 81% gain to the company's top line. The latest three year period has also seen an excellent 62% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 35% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

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

A significant share price dive has done very little to deflate Shenzhen Intellifusion Technologies' very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shenzhen Intellifusion Technologies 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. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Intellifusion Technologies (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.