What AVCON Information Technology Co., Ltd.'s (SZSE:300074) 48% Share Price Gain Is Not Telling You

The AVCON Information Technology Co., Ltd. (SZSE:300074) share price has done very well over the last month, posting an excellent gain of 48%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.0% in the last twelve months.

After such a large jump in price, AVCON Information Technology may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 6.1x, since almost half of all companies in the Communications in China have P/S ratios under 4.7x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for AVCON Information Technology

How AVCON Information Technology Has Been Performing

For example, consider that AVCON Information Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 AVCON Information Technology's earnings, revenue and cash flow.

How Is AVCON Information Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as AVCON Information Technology's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 12% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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 AVCON Information Technology'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. There's a very 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 AVCON Information Technology's P/S Mean For Investors?

AVCON Information Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

We've established that AVCON Information Technology 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for AVCON Information Technology (1 makes us a bit uncomfortable!) that you need to be mindful of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.