Revenues Not Telling The Story For Hangzhou DPtech Technologies Co.,Ltd. (SZSE:300768) After Shares Rise 33%

Hangzhou DPtech Technologies Co.,Ltd. (SZSE:300768) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 95% in the last year.

Since its price has surged higher, you could be forgiven for thinking Hangzhou DPtech TechnologiesLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11.9x, considering almost half the companies in China's Software industry have P/S ratios below 7.3x. 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 Hangzhou DPtech TechnologiesLtd

What Does Hangzhou DPtech TechnologiesLtd's Recent Performance Look Like?

Hangzhou DPtech TechnologiesLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hangzhou DPtech TechnologiesLtd.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as steep as Hangzhou DPtech TechnologiesLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 23% as estimated by the three analysts watching the company. With the industry predicted to deliver 28% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Hangzhou DPtech TechnologiesLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Hangzhou DPtech TechnologiesLtd's P/S?

The strong share price surge has lead to Hangzhou DPtech TechnologiesLtd'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.

We've concluded that Hangzhou DPtech TechnologiesLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Hangzhou DPtech TechnologiesLtd with six simple checks on some of these key factors.

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.