What Lootom Telcovideo Network (wuxi) Co., Ltd.'s (SZSE:300555) 29% Share Price Gain Is Not Telling You

Lootom Telcovideo Network (wuxi) Co., Ltd. (SZSE:300555) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Lootom Telcovideo Network (wuxi) may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.9x, since almost half of all companies in the Communications industry in China have P/S ratios under 4.4x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View 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. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. As a result, revenue from three years ago have also fallen 13% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 50% shows it's an unpleasant look.

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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

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. 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.

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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Lootom Telcovideo Network (wuxi) you should be aware of.

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.