The Price Is Right For Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) Even After Diving 33%

Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) shares have had a horrible month, losing 33% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 62% share price decline.

Although its price has dipped substantially, Hangzhou Raycloud TechnologyLtd may still be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 5.7x, since almost half of all companies in the Software in China have P/S ratios under 4.4x and even P/S lower than 2x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hangzhou Raycloud TechnologyLtd

How Has Hangzhou Raycloud TechnologyLtd Performed Recently?

Hangzhou Raycloud TechnologyLtd 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.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Hangzhou Raycloud TechnologyLtd's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.2%. The last three years don't look nice either as the company has shrunk revenue by 6.4% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 34% over the next year. That's shaping up to be materially higher than the 30% growth forecast for the broader industry.

In light of this, it's understandable that Hangzhou Raycloud TechnologyLtd's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Hangzhou Raycloud TechnologyLtd's P/S?

There's still some elevation in Hangzhou Raycloud TechnologyLtd's P/S, even if the same can't be said for its share price recently. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Hangzhou Raycloud TechnologyLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Hangzhou Raycloud TechnologyLtd has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Hangzhou Raycloud TechnologyLtd'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.