Allwin Telecommunication Co., Ltd. (SZSE:002231) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Allwin Telecommunication Co., Ltd. (SZSE:002231) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Even after such a large jump in price, there still wouldn't be many who think Allwin Telecommunication's price-to-sales (or "P/S") ratio of 5x is worth a mention when the median P/S in China's Communications industry is similar at about 5.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Allwin Telecommunication

How Has Allwin Telecommunication Performed Recently?

With revenue growth that's exceedingly strong of late, Allwin Telecommunication has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. 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 not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Allwin Telecommunication's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like Allwin Telecommunication's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an explosive gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 2.2% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 38% 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 find it worrying that Allwin Telecommunication's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Allwin Telecommunication's P/S Mean For Investors?

Allwin Telecommunication's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

The fact that Allwin Telecommunication currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Allwin Telecommunication (2 are concerning) 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.