Optimistic Investors Push ArcherMind Technology (Nanjing) Co., Ltd. (SZSE:300598) Shares Up 26% But Growth Is Lacking

ArcherMind Technology (Nanjing) Co., Ltd. (SZSE:300598) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 3.4% isn't as impressive.

In spite of the firm bounce in price, there still wouldn't be many who think ArcherMind Technology (Nanjing)'s price-to-sales (or "P/S") ratio of 4.3x is worth a mention when it essentially matches the median P/S in China's Software industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for ArcherMind Technology (Nanjing)

How ArcherMind Technology (Nanjing) Has Been Performing

As an illustration, revenue has deteriorated at ArcherMind Technology (Nanjing) over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like ArcherMind Technology (Nanjing)'s is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's top line. Still, the latest three year period has seen an excellent 57% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that ArcherMind Technology (Nanjing) is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From ArcherMind Technology (Nanjing)'s P/S?

ArcherMind Technology (Nanjing)'s stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of ArcherMind Technology (Nanjing) revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for ArcherMind Technology (Nanjing) (2 can't be ignored) you should be aware of.

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.