Fujian Rongji Software Co., Ltd. (SZSE:002474) Shares May Have Slumped 25% But Getting In Cheap Is Still Unlikely

Fujian Rongji Software Co., Ltd. (SZSE:002474) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 15% share price drop.

Even after such a large drop in price, Fujian Rongji Software's price-to-sales (or "P/S") ratio of 7.7x might still make it look like a strong sell right now compared to other companies in the IT industry in China, where around half of the companies have P/S ratios below 4x and even P/S below 2x 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 lofty.

View our latest analysis for Fujian Rongji Software

How Fujian Rongji Software Has Been Performing

For instance, Fujian Rongji Software's receding revenue in recent times would have to be some food for thought. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fujian Rongji Software will help you shine a light on its historical performance.

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

Fujian Rongji Software'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 26% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 17% shows it's an unpleasant look.

With this information, we find it concerning that Fujian Rongji Software is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Fujian Rongji Software's P/S?

Fujian Rongji Software's shares may have suffered, but its P/S remains high. 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.

We've established that Fujian Rongji Software currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Fujian Rongji Software (1 is significant!) that you should be aware of before investing here.

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.