What Jiangsu Hoperun Software Co., Ltd.'s (SZSE:300339) 25% Share Price Gain Is Not Telling You

Jiangsu Hoperun Software Co., Ltd. (SZSE:300339) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last month tops off a massive increase of 161% in the last year.

Following the firm bounce in price, when almost half of the companies in China's Software industry have price-to-sales ratios (or "P/S") below 7.6x, you may consider Jiangsu Hoperun Software as a stock not worth researching with its 13.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Jiangsu Hoperun Software

How Has Jiangsu Hoperun Software Performed Recently?

With revenue growth that's superior to most other companies of late, Jiangsu Hoperun Software has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu Hoperun Software.

Is There Enough Revenue Growth Forecasted For Jiangsu Hoperun Software?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jiangsu Hoperun Software's to be considered reasonable.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. The latest three year period has also seen a 22% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 25% over the next year. That's shaping up to be similar to the 26% growth forecast for the broader industry.

In light of this, it's curious that Jiangsu Hoperun Software's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Jiangsu Hoperun Software's P/S Mean For Investors?

The strong share price surge has lead to Jiangsu Hoperun Software's P/S soaring as well. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Jiangsu Hoperun Software currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Jiangsu Hoperun Software that you should be aware of.

If these risks are making you reconsider your opinion on Jiangsu Hoperun 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.