There's Reason For Concern Over Transportation Telecommunication and Information Development Inc. Ltd. Zhejiang's (SZSE:300469) Massive 33% Price Jump

Those holding Transportation Telecommunication and Information Development Inc. Ltd. Zhejiang (SZSE:300469) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.

After such a large jump in price, you could be forgiven for thinking Transportation Telecommunication and Information Development Zhejiang is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.4x, considering almost half the companies in China's IT industry have P/S ratios below 3.7x. 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.

Check out our latest analysis for Transportation Telecommunication and Information Development Zhejiang

What Does Transportation Telecommunication and Information Development Zhejiang's P/S Mean For Shareholders?

Transportation Telecommunication and Information Development Zhejiang has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Transportation Telecommunication and Information Development Zhejiang's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Transportation Telecommunication and Information Development Zhejiang's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 53% drop in revenue 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 40% shows it's an unpleasant look.

With this in mind, we find it worrying that Transportation Telecommunication and Information Development Zhejiang'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.

The Key Takeaway

Shares in Transportation Telecommunication and Information Development Zhejiang have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Transportation Telecommunication and Information Development Zhejiang revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Transportation Telecommunication and Information Development Zhejiang is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

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.