Optimistic Investors Push Shenzhen Ysstech Info-Tech Co.,Ltd (SZSE:300377) Shares Up 28% But Growth Is Lacking

Shenzhen Ysstech Info-Tech Co.,Ltd (SZSE:300377) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 266% following the latest surge, making investors sit up and take notice.

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 7.5x, you may consider Shenzhen Ysstech Info-TechLtd as a stock to avoid entirely with its 17x P/S ratio. 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 Shenzhen Ysstech Info-TechLtd

What Does Shenzhen Ysstech Info-TechLtd's P/S Mean For Shareholders?

For example, consider that Shenzhen Ysstech Info-TechLtd's financial performance has been poor lately as its revenue has been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Shenzhen Ysstech Info-TechLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shenzhen Ysstech Info-TechLtd?

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

Retrospectively, the last year delivered a frustrating 5.1% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 63% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 31% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Shenzhen Ysstech Info-TechLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Does Shenzhen Ysstech Info-TechLtd's P/S Mean For Investors?

The strong share price surge has lead to Shenzhen Ysstech Info-TechLtd'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.

The fact that Shenzhen Ysstech Info-TechLtd 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 3 warning signs for Shenzhen Ysstech Info-TechLtd (2 are concerning!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.