More Unpleasant Surprises Could Be In Store For AInnovation Technology Group Co., Ltd's (HKG:2121) Shares After Tumbling 29%

AInnovation Technology Group Co., Ltd (HKG:2121) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 19% in the last year.

Although its price has dipped substantially, there still wouldn't be many who think AInnovation Technology Group's price-to-sales (or "P/S") ratio of 2.3x is worth a mention when it essentially matches the median P/S in Hong Kong's Software industry. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for AInnovation Technology Group

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

While the industry has experienced revenue growth lately, AInnovation Technology Group's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, AInnovation Technology Group would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.6%. Regardless, revenue has managed to lift by a handy 18% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 19% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 35% growth forecast for the broader industry.

With this in mind, we find it intriguing that AInnovation Technology Group's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

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

With its share price dropping off a cliff, the P/S for AInnovation Technology Group looks to be in line with the rest of the Software industry. 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.

When you consider that AInnovation Technology Group's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with AInnovation Technology Group, and understanding should be part of your investment process.

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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.