iSoftStone Information Technology (Group) Co., Ltd. (SZSE:301236) Stock Catapults 57% Though Its Price And Business Still Lag The Industry

iSoftStone Information Technology (Group) Co., Ltd. (SZSE:301236) shares have had a really impressive month, gaining 57% after a shaky period beforehand. The last month tops off a massive increase of 116% in the last year.

In spite of the firm bounce in price, iSoftStone Information Technology (Group) may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.9x, considering almost half of all companies in the IT industry in China have P/S ratios greater than 3.7x and even P/S higher than 7x 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 limited.

Check out our latest analysis for iSoftStone Information Technology (Group)

How iSoftStone Information Technology (Group) Has Been Performing

iSoftStone Information Technology (Group) could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on iSoftStone Information Technology (Group).

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like iSoftStone Information Technology (Group)'s to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.8%. Still, the latest three year period has seen an excellent 37% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 32% as estimated by the five analysts watching the company. With the industry predicted to deliver 42% growth, the company is positioned for a weaker revenue result.

With this information, we can see why iSoftStone Information Technology (Group) is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift iSoftStone Information Technology (Group)'s P/S close to the industry median. 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.

We've established that iSoftStone Information Technology (Group) maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware iSoftStone Information Technology (Group) is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

If you're unsure about the strength of iSoftStone Information Technology (Group)'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.