Improved Revenues Required Before Digital China Information Service Group Company Ltd. (SZSE:000555) Stock's 29% Jump Looks Justified

Digital China Information Service Group Company Ltd. (SZSE:000555) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Even after such a large jump in price, Digital China Information Service Group's price-to-sales (or "P/S") ratio of 1.3x might still make it look like a strong buy right now compared to the wider IT industry in China, where around half of the companies have P/S ratios above 6.2x and even P/S above 13x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

Check out our latest analysis for Digital China Information Service Group

How Has Digital China Information Service Group Performed Recently?

Recent times haven't been great for Digital China Information Service Group as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Digital China Information Service Group will help you uncover what's on the horizon.

How Is Digital China Information Service Group's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Digital China Information Service Group's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.9% last year. The solid recent performance means it was also able to grow revenue by 10.0% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 4.9% over the next year. Meanwhile, the rest of the industry is forecast to expand by 17%, which is noticeably more attractive.

With this in consideration, its clear as to why Digital China Information Service Group's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does Digital China Information Service Group's P/S Mean For Investors?

Even after such a strong price move, Digital China Information Service Group's P/S still trails the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As expected, our analysis of Digital China Information Service Group's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Digital China Information Service Group that you need to be mindful of.

If you're unsure about the strength of Digital China Information Service Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.