There's Reason For Concern Over Lootom Telcovideo Network (wuxi) Co., Ltd.'s (SZSE:300555) Massive 25% Price Jump

Despite an already strong run, Lootom Telcovideo Network (wuxi) Co., Ltd. (SZSE:300555) shares have been powering on, with a gain of 25% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Following the firm bounce in price, Lootom Telcovideo Network (wuxi)'s price-to-sales (or "P/S") ratio of 13.3x might make it look like a strong sell right now compared to other companies in the Communications industry in China, where around half of the companies have P/S ratios below 5.5x and even P/S below 2x are quite common. 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 Lootom Telcovideo Network (wuxi)

How Lootom Telcovideo Network (wuxi) Has Been Performing

For instance, Lootom Telcovideo Network (wuxi)'s receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Lootom Telcovideo Network (wuxi), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Lootom Telcovideo Network (wuxi)'s Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Lootom Telcovideo Network (wuxi)'s is when the company's growth is on track to outshine the industry decidedly.

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 32%. The last three years don't look nice either as the company has shrunk revenue by 17% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 37% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Lootom Telcovideo Network (wuxi)'s P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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.

The Final Word

Lootom Telcovideo Network (wuxi)'s P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Lootom Telcovideo Network (wuxi) revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Lootom Telcovideo Network (wuxi) that we have uncovered.

If these risks are making you reconsider your opinion on Lootom Telcovideo Network (wuxi), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.