Investor Optimism Abounds Datang Telecom Technology Co., Ltd. (SHSE:600198) But Growth Is Lacking

When close to half the companies in the Communications industry in China have price-to-sales ratios (or "P/S") below 3.4x, you may consider Datang Telecom Technology Co., Ltd. (SHSE:600198) as a stock to avoid entirely with its 9.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Datang Telecom Technology

What Does Datang Telecom Technology's Recent Performance Look Like?

For instance, Datang Telecom Technology's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Datang Telecom Technology will help you shine a light on its historical performance.

How Is Datang Telecom Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Datang Telecom Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 46% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 42% shows it's an unpleasant look.

With this information, we find it concerning that Datang Telecom Technology 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. 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.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Datang Telecom Technology 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Datang Telecom Technology that you should be aware of.

If these risks are making you reconsider your opinion on Datang Telecom Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.