Wuhan Kotei Informatics Co.,Ltd.'s (SZSE:301221) 28% Price Boost Is Out Of Tune With Revenues

Wuhan Kotei Informatics Co.,Ltd. (SZSE:301221) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 31% in the last twelve months.

Following the firm bounce in price, Wuhan Kotei InformaticsLtd may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 6.2x, when you consider almost half of the companies in the Software industry in China have P/S ratios under 4.7x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Wuhan Kotei InformaticsLtd

How Has Wuhan Kotei InformaticsLtd Performed Recently?

Wuhan Kotei InformaticsLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Wuhan Kotei InformaticsLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Wuhan Kotei InformaticsLtd would need to produce impressive growth 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 3.6%. Even so, admirably revenue has lifted 55% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 18% as estimated by the sole analyst watching the company. With the industry predicted to deliver 26% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Wuhan Kotei InformaticsLtd's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Wuhan Kotei InformaticsLtd's P/S

Wuhan Kotei InformaticsLtd's P/S is on the rise since its shares have risen strongly. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Wuhan Kotei InformaticsLtd, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Wuhan Kotei InformaticsLtd that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.