Guangdong Weide Information Technology CO,.Ltd.'s (SHSE:688171) 33% Share Price Surge Not Quite Adding Up

Guangdong Weide Information Technology CO,.Ltd. (SHSE:688171) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. 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, Guangdong Weide Information Technology CO.Ltd may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 12.6x, since almost half of all companies in the Communications industry in China have P/S ratios under 4.7x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Guangdong Weide Information Technology CO.Ltd

How Guangdong Weide Information Technology CO.Ltd Has Been Performing

For instance, Guangdong Weide Information Technology CO.Ltd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

How Is Guangdong Weide Information Technology CO.Ltd's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 26% 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 25% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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

In light of this, it's alarming that Guangdong Weide Information Technology CO.Ltd's P/S sits above the majority of other companies. 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 Final Word

The strong share price surge has lead to Guangdong Weide Information Technology CO.Ltd's P/S soaring as well. 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 Guangdong Weide Information Technology CO.Ltd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Guangdong Weide Information Technology CO.Ltd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.