Shandong New Beiyang Information Technology Co., Ltd. (SZSE:002376) Surges 38% Yet Its Low P/S Is No Reason For Excitement

Despite an already strong run, Shandong New Beiyang Information Technology Co., Ltd. (SZSE:002376) shares have been powering on, with a gain of 38% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, Shandong New Beiyang Information Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.1x, since almost half of all companies in the Tech industry in China have P/S ratios greater than 3x and even P/S higher than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Shandong New Beiyang Information Technology

How Shandong New Beiyang Information Technology Has Been Performing

The recent revenue growth at Shandong New Beiyang Information Technology would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Although there are no analyst estimates available for Shandong New Beiyang Information Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shandong New Beiyang Information Technology's Revenue Growth Trending?

Shandong New Beiyang Information Technology's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.7% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 12% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 15% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Shandong New Beiyang Information Technology's P/S would sit below the majority of other companies. 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 Key Takeaway

Shandong New Beiyang Information Technology's stock price has surged recently, but its but its P/S still remains modest. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It's no surprise that Shandong New Beiyang Information Technology maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. 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 and we've discovered 3 warning signs for Shandong New Beiyang Information Technology (1 is potentially serious!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.