Doushen (Beijing) Education & Technology INC. (SZSE:300010) Stock Rockets 56% As Investors Are Less Pessimistic Than Expected

The Doushen (Beijing) Education & Technology INC. (SZSE:300010) share price has done very well over the last month, posting an excellent gain of 56%. Looking back a bit further, it's encouraging to see the stock is up 77% in the last year.

Following the firm bounce in price, given around half the companies in China's Software industry have price-to-sales ratios (or "P/S") below 5.2x, you may consider Doushen (Beijing) Education & Technology as a stock to avoid entirely with its 10.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Doushen (Beijing) Education & Technology

How Has Doushen (Beijing) Education & Technology Performed Recently?

For instance, Doushen (Beijing) Education & Technology's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Doushen (Beijing) Education & Technology will help you shine a light on its historical performance.

How Is Doushen (Beijing) Education & Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Doushen (Beijing) Education & Technology's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. The last three years don't look nice either as the company has shrunk revenue by 36% in aggregate. 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 26% shows it's an unpleasant look.

With this in mind, we find it worrying that Doushen (Beijing) Education & Technology's P/S exceeds that of its industry peers. 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 Doushen (Beijing) Education & Technology's P/S?

The strong share price surge has lead to Doushen (Beijing) Education & Technology's P/S soaring as well. 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 Doushen (Beijing) Education & Technology 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.

Before you take the next step, you should know about the 3 warning signs for Doushen (Beijing) Education & Technology (2 make us uncomfortable!) that we have uncovered.

If you're unsure about the strength of Doushen (Beijing) Education & Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.