Revenues Not Telling The Story For Allwin Telecommunication Co., Ltd. (SZSE:002231) After Shares Rise 40%

Allwin Telecommunication Co., Ltd. (SZSE:002231) shares have continued their recent momentum with a 40% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

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 4.7x is worth a mention when it essentially matches the median P/S in China's Communications industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Allwin Telecommunication

How Has Allwin Telecommunication Performed Recently?

Allwin Telecommunication certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

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.

Taking a look back first, we see that the company grew revenue by an impressive 134% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 3.1% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

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 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 We Can Learn From Allwin Telecommunication's P/S?

Allwin Telecommunication appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Our look at Allwin Telecommunication revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Allwin Telecommunication (1 is potentially serious!) that you need to take into consideration.

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

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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.