Sichuan Discovery Dream Science & Technology Co.,Ltd (SZSE:301213) Stock Rockets 42% As Investors Are Less Pessimistic Than Expected

Sichuan Discovery Dream Science & Technology Co.,Ltd (SZSE:301213) shareholders would be excited to see that the share price has had a great month, posting a 42% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Sichuan Discovery Dream Science & TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 27.9x, considering almost half the companies in China's Software industry have P/S ratios below 5.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Sichuan Discovery Dream Science & TechnologyLtd

How Has Sichuan Discovery Dream Science & TechnologyLtd Performed Recently?

It looks like revenue growth has deserted Sichuan Discovery Dream Science & TechnologyLtd recently, which is not something to boast about. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Sichuan Discovery Dream Science & TechnologyLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Sichuan Discovery Dream Science & TechnologyLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Discovery Dream Science & TechnologyLtd's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 31% overall from three years ago. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 27% 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 Sichuan Discovery Dream Science & TechnologyLtd's P/S sits above the majority of other companies. 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.

What We Can Learn From Sichuan Discovery Dream Science & TechnologyLtd's P/S?

Shares in Sichuan Discovery Dream Science & TechnologyLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sichuan Discovery Dream Science & TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Having said that, be aware Sichuan Discovery Dream Science & TechnologyLtd is showing 2 warning signs in our investment analysis, you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.