There's Reason For Concern Over Qingdao Eastsoft Communication Technology Co.,Ltd's (SZSE:300183) Massive 30% Price Jump

Qingdao Eastsoft Communication Technology Co.,Ltd (SZSE:300183) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

After such a large jump in price, you could be forgiven for thinking Qingdao Eastsoft Communication TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.5x, considering almost half the companies in China's Communications industry have P/S ratios below 5.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Qingdao Eastsoft Communication TechnologyLtd

What Does Qingdao Eastsoft Communication TechnologyLtd's P/S Mean For Shareholders?

Revenue has risen firmly for Qingdao Eastsoft Communication TechnologyLtd recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Qingdao Eastsoft Communication TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 21%. The latest three year period has also seen a 25% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Qingdao Eastsoft Communication TechnologyLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Qingdao Eastsoft Communication TechnologyLtd's P/S Mean For Investors?

The strong share price surge has lead to Qingdao Eastsoft Communication TechnologyLtd's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Qingdao Eastsoft Communication TechnologyLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Qingdao Eastsoft Communication TechnologyLtd (at least 1 which is concerning), and understanding them should be part of your investment process.

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.