More Unpleasant Surprises Could Be In Store For Wisesoft Co., Ltd.'s (SZSE:002253) Shares After Tumbling 27%

The Wisesoft Co., Ltd. (SZSE:002253) share price has fared very poorly over the last month, falling by a substantial 27%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 30% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Wisesoft is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.7x, considering almost half the companies in China's Software industry have P/S ratios below 5.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Wisesoft

What Does Wisesoft's Recent Performance Look Like?

For example, consider that Wisesoft's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Wisesoft's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Wisesoft's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's top line. As a result, revenue from three years ago have also fallen 46% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 34% shows it's an unpleasant look.

In light of this, it's alarming that Wisesoft's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Wisesoft's P/S

A significant share price dive has done very little to deflate Wisesoft's very lofty P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Wisesoft currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Wisesoft (1 can't be ignored) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.