Getting In Cheap On SenseTime Group Inc. (HKG:20) Might Be Difficult

SenseTime Group Inc.'s (HKG:20) price-to-sales (or "P/S") ratio of 13.6x may look like a poor investment opportunity when you consider close to half the companies in the Software industry in Hong Kong have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for SenseTime Group

How Has SenseTime Group Performed Recently?

While the industry has experienced revenue growth lately, SenseTime Group's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think SenseTime Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is SenseTime Group's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like SenseTime Group's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 26% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 40% per annum as estimated by the eleven analysts watching the company. That's shaping up to be materially higher than the 33% per year growth forecast for the broader industry.

In light of this, it's understandable that SenseTime Group's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does SenseTime Group's P/S Mean For Investors?

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.

Our look into SenseTime Group shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 1 warning sign for SenseTime Group you should be aware of.

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.