Revenues Not Telling The Story For Wondershare Technology Group Co., Ltd. (SZSE:300624) After Shares Rise 47%

Wondershare Technology Group Co., Ltd. (SZSE:300624) shares have had a really impressive month, gaining 47% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Since its price has surged higher, you could be forgiven for thinking Wondershare Technology Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11x, considering almost half the companies in China's Software industry have P/S ratios below 6.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Wondershare Technology Group

How Wondershare Technology Group Has Been Performing

Wondershare Technology Group's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wondershare Technology Group.

Is There Enough Revenue Growth Forecasted For Wondershare Technology Group?

Wondershare Technology Group'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.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 42% overall rise in revenue, in spite of its uninspiring short-term performance. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 21% over the next year. That's shaping up to be materially lower than the 28% growth forecast for the broader industry.

In light of this, it's alarming that Wondershare Technology Group's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Wondershare Technology Group's P/S

The strong share price surge has lead to Wondershare Technology Group's P/S soaring as well. 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.

It comes as a surprise to see Wondershare Technology Group trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Wondershare Technology Group (of which 1 is a bit unpleasant!) you should know about.

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.