AVIT Ltd.'s (SZSE:300264) Business Is Yet to Catch Up With Its Share Price

AVIT Ltd.'s (SZSE:300264) price-to-sales (or "P/S") ratio of 16.5x might make it look like a strong sell right now compared to the IT industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for AVIT

How AVIT Has Been Performing

With revenue growth that's exceedingly strong of late, AVIT has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little 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 AVIT will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For AVIT?

The only time you'd be truly comfortable seeing a P/S as steep as AVIT's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 82% gain to the company's top line. As a result, it also grew revenue by 21% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 19% shows it's noticeably less attractive.

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

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that AVIT currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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 1 warning sign for AVIT that we have uncovered.

If these risks are making you reconsider your opinion on AVIT, 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.