Fujian Rongji Software Co., Ltd.'s (SZSE:002474) 37% Price Boost Is Out Of Tune With Revenues

Fujian Rongji Software Co., Ltd. (SZSE:002474) shares have continued their recent momentum with a 37% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 3.6% isn't as impressive.

Following the firm bounce in price, Fujian Rongji Software may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 10.7x, since almost half of all companies in the IT industry in China have P/S ratios under 4.9x and even P/S lower than 2x are not unusual. 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

What Does Fujian Rongji Software's P/S Mean For Shareholders?

For instance, Fujian Rongji Software's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Fujian Rongji Software's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Fujian Rongji Software?

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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 26%. As a result, revenue from three years ago have also fallen 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 19% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Fujian Rongji Software is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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?

Shares in Fujian Rongji Software have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Fujian Rongji Software, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Fujian Rongji Software, 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.