Risks To Shareholder Returns Are Elevated At These Prices For Hunan Creator Information Technologies CO., LTD. (SZSE:300730)

You may think that with a price-to-sales (or "P/S") ratio of 11.7x Hunan Creator Information Technologies CO., LTD. (SZSE:300730) is a stock to avoid completely, seeing as almost half of all the IT companies in China have P/S ratios under 4.5x and even P/S lower than 2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Hunan Creator Information Technologies

What Does Hunan Creator Information Technologies' Recent Performance Look Like?

For example, consider that Hunan Creator Information Technologies' financial performance has been poor lately as its revenue has been in decline. 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.

Although there are no analyst estimates available for Hunan Creator Information Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hunan Creator Information Technologies' Revenue Growth Trending?

In order to justify its P/S ratio, Hunan Creator Information Technologies would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 40%. The last three years don't look nice either as the company has shrunk revenue by 46% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Hunan Creator Information Technologies' 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 Final Word

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.

We've established that Hunan Creator Information Technologies 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Hunan Creator Information Technologies that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.