Qingdao Eastsoft Communication Technology Co.,Ltd's (SZSE:300183) Shareholders Might Be Looking For Exit

You may think that with a price-to-sales (or "P/S") ratio of 4.7x Qingdao Eastsoft Communication Technology Co.,Ltd (SZSE:300183) is a stock to potentially avoid, seeing as almost half of all the Communications companies in China have P/S ratios under 3.8x and even P/S lower than 1.8x aren't out of the ordinary. 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.

Check out our latest analysis for Qingdao Eastsoft Communication TechnologyLtd

How Has Qingdao Eastsoft Communication TechnologyLtd Performed Recently?

Revenue has risen firmly for Qingdao Eastsoft Communication TechnologyLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little 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 Qingdao Eastsoft Communication TechnologyLtd's earnings, revenue and cash flow.

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

Qingdao Eastsoft Communication TechnologyLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. As a result, it also grew revenue by 16% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 46% shows it's noticeably less attractive.

With this information, we find it concerning that Qingdao Eastsoft Communication TechnologyLtd is trading at a P/S higher than the industry. 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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Qingdao Eastsoft Communication TechnologyLtd's P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Qingdao Eastsoft Communication TechnologyLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Qingdao Eastsoft Communication TechnologyLtd (1 is a bit unpleasant) 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.