With Jilin University Zhengyuan Information Technologies Co., Ltd. (SZSE:003029) It Looks Like You'll Get What You Pay For

Jilin University Zhengyuan Information Technologies Co., Ltd.'s (SZSE:003029) price-to-sales (or "P/S") ratio of 8x may look like a poor investment opportunity when you consider close to half the companies in the Software industry in China have P/S ratios below 4.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jilin University Zhengyuan Information Technologies

How Has Jilin University Zhengyuan Information Technologies Performed Recently?

Jilin University Zhengyuan Information Technologies hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Jilin University Zhengyuan Information Technologies will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Jilin University Zhengyuan Information Technologies?

In order to justify its P/S ratio, Jilin University Zhengyuan Information Technologies would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 68%. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 190% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 33% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Jilin University Zhengyuan Information Technologies' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Jilin University Zhengyuan Information Technologies maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Jilin University Zhengyuan Information Technologies is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

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.