Risks To Shareholder Returns Are Elevated At These Prices For Wuhan Dameng Database Company Limited (SHSE:688692)

When you see that almost half of the companies in the Software industry in China have price-to-sales ratios (or "P/S") below 7.7x, Wuhan Dameng Database Company Limited (SHSE:688692) looks to be giving off strong sell signals with its 29.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Wuhan Dameng Database

How Wuhan Dameng Database Has Been Performing

Recent times have been advantageous for Wuhan Dameng Database as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wuhan Dameng Database.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 32% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 17% as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 28%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Wuhan Dameng Database's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Wuhan Dameng Database, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Wuhan Dameng Database (of which 1 is a bit unpleasant!) you should know about.

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.