Xinjiang Sailing Information Technology Co., Ltd.'s (SZSE:300588) Shares Climb 27% But Its Business Is Yet to Catch Up

Despite an already strong run, Xinjiang Sailing Information Technology Co., Ltd. (SZSE:300588) shares have been powering on, with a gain of 27% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Since its price has surged higher, Xinjiang Sailing Information Technology's price-to-sales (or "P/S") ratio of 17.4x might make it look like a strong sell right now compared to other companies in the IT industry in China, where around half of the companies have P/S ratios below 4.7x and even P/S below 2x are quite common. 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 Xinjiang Sailing Information Technology

How Has Xinjiang Sailing Information Technology Performed Recently?

For instance, Xinjiang Sailing Information Technology's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Xinjiang Sailing Information Technology will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Xinjiang Sailing Information Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Xinjiang Sailing Information Technology's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 7.7%. As a result, revenue from three years ago have also fallen 33% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 18% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Xinjiang Sailing Information Technology is trading at a P/S higher than the industry. 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.

The Bottom Line On Xinjiang Sailing Information Technology's P/S

Shares in Xinjiang Sailing Information Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Xinjiang Sailing Information Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Xinjiang Sailing Information Technology that 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.