Lacklustre Performance Is Driving Gohigh Networks Co.,Ltd's (SZSE:000851) 28% Price Drop

Gohigh Networks Co.,Ltd (SZSE:000851) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 38% in that time.

After such a large drop in price, Gohigh NetworksLtd may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.7x, since almost half of all companies in the Communications industry in China have P/S ratios greater than 4.4x and even P/S higher than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Gohigh NetworksLtd

What Does Gohigh NetworksLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Gohigh NetworksLtd over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Gohigh NetworksLtd's is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. This means it has also seen a slide in revenue over the longer-term as revenue is down 26% 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.

Comparing that to the industry, which is predicted to deliver 45% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Gohigh NetworksLtd's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Gohigh NetworksLtd's P/S

Gohigh NetworksLtd's P/S looks about as weak as its stock price lately. 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.

It's no surprise that Gohigh NetworksLtd maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Gohigh NetworksLtd that you should be aware of.

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.