Newland Digital Technology Co.,Ltd.'s (SZSE:000997) Price Is Right But Growth Is Lacking After Shares Rocket 29%

Newland Digital Technology Co.,Ltd. (SZSE:000997) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Although its price has surged higher, Newland Digital TechnologyLtd's price-to-sales (or "P/S") ratio of 2x might still make it look like a strong buy right now compared to the wider Software industry in China, where around half of the companies have P/S ratios above 4.9x and even P/S above 8x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Newland Digital TechnologyLtd

What Does Newland Digital TechnologyLtd's P/S Mean For Shareholders?

Recent times have been advantageous for Newland Digital TechnologyLtd as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

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

In order to justify its P/S ratio, Newland Digital TechnologyLtd would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a decent 6.5% gain to the company's revenues. Revenue has also lifted 7.2% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 10% as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 26%, which is noticeably more attractive.

With this information, we can see why Newland Digital TechnologyLtd is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Newland Digital TechnologyLtd's P/S Mean For Investors?

Shares in Newland Digital TechnologyLtd have risen appreciably however, its P/S is still subdued. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Newland Digital TechnologyLtd's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Newland Digital TechnologyLtd that you should be aware of.

If these risks are making you reconsider your opinion on Newland Digital TechnologyLtd, 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.