Chengdu Information Technology of Chinese Academy of Sciences Co.,Ltd's (SZSE:300678) Business Is Yet to Catch Up With Its Share Price

Chengdu Information Technology of Chinese Academy of Sciences Co.,Ltd's (SZSE:300678) price-to-sales (or "P/S") ratio of 16.6x might make it look like a strong sell right now compared to the IT industry in China, where around half of the companies have P/S ratios below 4.1x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Chengdu Information Technology of Chinese Academy of SciencesLtd

How Has Chengdu Information Technology of Chinese Academy of SciencesLtd Performed Recently?

Revenue has risen at a steady rate over the last year for Chengdu Information Technology of Chinese Academy of SciencesLtd, which is generally not a bad outcome. It might be that many expect the reasonable 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 Chengdu Information Technology of Chinese Academy of SciencesLtd's earnings, revenue and cash flow.

How Is Chengdu Information Technology of Chinese Academy of SciencesLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Chengdu Information Technology of Chinese Academy of SciencesLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 7.4% gain to the company's revenues. Revenue has also lifted 19% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Chengdu Information Technology of Chinese Academy of SciencesLtd's P/S exceeds that of its industry peers. 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 Chengdu Information Technology of Chinese Academy of SciencesLtd's P/S

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 Chengdu Information Technology of Chinese Academy of SciencesLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Chengdu Information Technology of Chinese Academy of SciencesLtd (1 makes us a bit uncomfortable!) that we have uncovered.

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.