Optimistic Investors Push SDIC Intelligence Xiamen Information Co., Ltd. (SZSE:300188) Shares Up 27% But Growth Is Lacking

SDIC Intelligence Xiamen Information Co., Ltd. (SZSE:300188) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.1% over the last year.

After such a large jump in price, SDIC Intelligence Xiamen Information's price-to-sales (or "P/S") ratio of 6.4x might make it look like a sell right now compared to the wider Electronic industry in China, where around half of the companies have P/S ratios below 4.6x and even P/S below 2x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for SDIC Intelligence Xiamen Information

What Does SDIC Intelligence Xiamen Information's Recent Performance Look Like?

SDIC Intelligence Xiamen Information could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SDIC Intelligence Xiamen Information.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. Still, lamentably revenue has fallen 16% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 23% during the coming year according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 25%, which is not materially different.

With this in consideration, we find it intriguing that SDIC Intelligence Xiamen Information's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From SDIC Intelligence Xiamen Information's P/S?

The large bounce in SDIC Intelligence Xiamen Information's shares has lifted the company's P/S handsomely. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that SDIC Intelligence Xiamen Information currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for SDIC Intelligence Xiamen Information with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.