Beijing Dataway Horizon Co.,Ltd. (SZSE:301169) Stock Rockets 37% As Investors Are Less Pessimistic Than Expected

Beijing Dataway Horizon Co.,Ltd. (SZSE:301169) shareholders have had their patience rewarded with a 37% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

Following the firm bounce in price, when almost half of the companies in China's IT industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Beijing Dataway HorizonLtd as a stock not worth researching with its 8x P/S ratio. 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 Beijing Dataway HorizonLtd

How Beijing Dataway HorizonLtd Has Been Performing

The recent revenue growth at Beijing Dataway HorizonLtd would have to be considered satisfactory if not spectacular. 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.

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

Is There Enough Revenue Growth Forecasted For Beijing Dataway HorizonLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Beijing Dataway HorizonLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 13% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Beijing Dataway HorizonLtd's P/S sits above the majority of other companies. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Beijing Dataway HorizonLtd's P/S

Beijing Dataway HorizonLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Beijing Dataway HorizonLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 2 warning signs for Beijing Dataway HorizonLtd (1 is a bit unpleasant!) that we have uncovered.

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.