Shanghai Newtouch Software Co., Ltd.'s (SHSE:688590) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Shanghai Newtouch Software Co., Ltd. (SHSE:688590) shares have continued their recent momentum with a 27% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.

Although its price has surged higher, Shanghai Newtouch Software may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.4x, since almost half of all companies in the IT industry in China have P/S ratios greater than 4.7x and even P/S higher than 9x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shanghai Newtouch Software

How Has Shanghai Newtouch Software Performed Recently?

Revenue has risen firmly for Shanghai Newtouch Software recently, which is pleasing to see. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Shanghai Newtouch Software will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Shanghai Newtouch Software, 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 Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shanghai Newtouch Software's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 62% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Shanghai Newtouch Software's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shanghai Newtouch Software's stock price has surged recently, but its but its P/S still remains modest. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

In line with expectations, Shanghai Newtouch Software maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Shanghai Newtouch Software (4 can't be ignored!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Shanghai Newtouch Software, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.