The Price Is Right For Beijing Tongtech Co., Ltd. (SZSE:300379) Even After Diving 27%

To the annoyance of some shareholders, Beijing Tongtech Co., Ltd. (SZSE:300379) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 62% share price decline.

Even after such a large drop in price, when almost half of the companies in China's Software industry have price-to-sales ratios (or "P/S") below 4.9x, you may still consider Beijing Tongtech as a stock probably not worth researching with its 6.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Beijing Tongtech

What Does Beijing Tongtech's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Beijing Tongtech has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Beijing Tongtech will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Beijing Tongtech?

In order to justify its P/S ratio, Beijing Tongtech would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. The latest three year period has also seen an excellent 97% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 44% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 28%, which is noticeably less attractive.

With this information, we can see why Beijing Tongtech is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Beijing Tongtech's P/S

There's still some elevation in Beijing Tongtech's P/S, even if the same can't be said for its share price recently. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Beijing Tongtech 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. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for Beijing Tongtech you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.