Why Investors Shouldn't Be Surprised By Shanghai Suochen Information Technology Co.,Ltd.'s (SHSE:688507) 41% Share Price Surge

Shanghai Suochen Information Technology Co.,Ltd. (SHSE:688507) shares have continued their recent momentum with a 41% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, you could be forgiven for thinking Shanghai Suochen Information TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 20x, considering almost half the companies in China's Software industry have P/S ratios below 7.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Shanghai Suochen Information TechnologyLtd

How Shanghai Suochen Information TechnologyLtd Has Been Performing

Shanghai Suochen Information TechnologyLtd 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 Shanghai Suochen Information TechnologyLtd.

Do Revenue Forecasts Match The High P/S Ratio?

Shanghai Suochen Information TechnologyLtd'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.

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 82% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 62% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 33% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Shanghai Suochen Information TechnologyLtd's 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.

The Final Word

The strong share price surge has lead to Shanghai Suochen Information TechnologyLtd's P/S soaring as well. 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.

Our look into Shanghai Suochen Information TechnologyLtd shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Shanghai Suochen Information TechnologyLtd you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.