Optimistic Investors Push Gosuncn Technology Group Co., Ltd. (SZSE:300098) Shares Up 32% But Growth Is Lacking

Gosuncn Technology Group Co., Ltd. (SZSE:300098) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 92% in the last year.

After such a large jump in price, you could be forgiven for thinking Gosuncn Technology Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 7.4x, considering almost half the companies in China's Communications industry have P/S ratios below 5.7x. 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.

See our latest analysis for Gosuncn Technology Group

How Gosuncn Technology Group Has Been Performing

While the industry has experienced revenue growth lately, Gosuncn Technology Group's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Gosuncn Technology Group will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Gosuncn Technology Group would need to produce impressive growth in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. As a result, revenue from three years ago have also fallen 36% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 19% as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 34%, which is noticeably more attractive.

In light of this, it's alarming that Gosuncn Technology Group's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Gosuncn Technology Group's P/S is on the rise since its shares have risen strongly. 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.

It comes as a surprise to see Gosuncn Technology Group trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Gosuncn Technology Group that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.