NOVA Technology Corporation Limited (SZSE:300921) Stocks Shoot Up 35% But Its P/S Still Looks Reasonable

NOVA Technology Corporation Limited (SZSE:300921) shareholders have had their patience rewarded with a 35% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.8% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Telecom industry have price-to-sales ratios (or "P/S") below 3.9x, you may consider NOVA Technology as a stock probably not worth researching with its 4.8x P/S ratio. 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.

View our latest analysis for NOVA Technology

What Does NOVA Technology's P/S Mean For Shareholders?

The revenue growth achieved at NOVA Technology over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 NOVA Technology's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, NOVA Technology would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.3% last year. Revenue has also lifted 22% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 4.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in consideration, it's not hard to understand why NOVA Technology's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On NOVA Technology's P/S

NOVA Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

As we suspected, our examination of NOVA Technology revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

We don't want to rain on the parade too much, but we did also find 5 warning signs for NOVA Technology (3 are a bit unpleasant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on NOVA Technology, 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.