There's Reason For Concern Over Sichuan Discovery Dream Science & Technology Co.,Ltd's (SZSE:301213) Price

Sichuan Discovery Dream Science & Technology Co.,Ltd's (SZSE:301213) price-to-sales (or "P/S") ratio of 34.1x may look like a poor investment opportunity when you consider close to half the companies in the Software industry in China have P/S ratios below 7.9x. 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 Sichuan Discovery Dream Science & TechnologyLtd

How Sichuan Discovery Dream Science & TechnologyLtd Has Been Performing

The revenue growth achieved at Sichuan Discovery Dream Science & TechnologyLtd over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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.

How Is Sichuan Discovery Dream Science & TechnologyLtd's Revenue Growth Trending?

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 growth, the company posted a terrific increase of 30%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 24% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 28% shows it's an unpleasant look.

With this information, we find it concerning that Sichuan Discovery Dream Science & TechnologyLtd is trading at a P/S higher than the industry. 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.

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

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Sichuan Discovery Dream Science & TechnologyLtd 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. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Sichuan Discovery Dream Science & TechnologyLtd that you need to be mindful of.

If you're unsure about the strength of Sichuan Discovery Dream Science & TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.