Beijing Shiji Information Technology Co., Ltd.'s (SZSE:002153) Popularity With Investors Is Under Threat From Overpricing

With a price-to-sales (or "P/S") ratio of 5.8x Beijing Shiji Information Technology Co., Ltd. (SZSE:002153) may be sending bearish signals at the moment, given that almost half of all Software companies in China have P/S ratios under 4.6x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Beijing Shiji Information Technology

How Has Beijing Shiji Information Technology Performed Recently?

Beijing Shiji Information Technology 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Beijing Shiji Information Technology.

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

In order to justify its P/S ratio, Beijing Shiji Information Technology would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 9.2% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 15% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 19% as estimated by the nine analysts watching the company. With the industry predicted to deliver 30% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Beijing Shiji Information Technology's P/S sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It comes as a surprise to see Beijing Shiji Information Technology trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Beijing Shiji Information Technology with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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