Wuhan Kotei Informatics Co.,Ltd.'s (SZSE:301221) P/S Is Still On The Mark Following 41% Share Price Bounce

Wuhan Kotei Informatics Co.,Ltd. (SZSE:301221) shareholders are no doubt pleased to see that the share price has bounced 41% in the last month, although it is still struggling to make up recently lost ground. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.3% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Wuhan Kotei InformaticsLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 6.6x, considering almost half the companies in China's Software industry have P/S ratios below 5.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Wuhan Kotei InformaticsLtd

How Wuhan Kotei InformaticsLtd Has Been Performing

Recent times have been advantageous for Wuhan Kotei InformaticsLtd as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Wuhan Kotei InformaticsLtd will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Wuhan Kotei InformaticsLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 79% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 45% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 33%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Wuhan Kotei InformaticsLtd's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Wuhan Kotei InformaticsLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Wuhan Kotei InformaticsLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Wuhan Kotei InformaticsLtd has 1 warning sign we think you should be aware of.

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.