There's Reason For Concern Over AInnovation Technology Group Co., Ltd's (HKG:2121) Massive 35% Price Jump

AInnovation Technology Group Co., Ltd (HKG:2121) shares have had a really impressive month, gaining 35% after a shaky period beforehand. But the last month did very little to improve the 51% share price decline over the last year.

In spite of the firm bounce in price, there still wouldn't be many who think AInnovation Technology Group's price-to-sales (or "P/S") ratio of 1.8x is worth a mention when the median P/S in Hong Kong's Software industry is similar at about 1.4x. 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.

View our latest analysis for AInnovation Technology Group

How Has AInnovation Technology Group Performed Recently?

AInnovation Technology Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on AInnovation Technology Group.

Is There Some Revenue Growth Forecasted For AInnovation Technology Group?

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

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 24%. Still, the latest three year period has seen an excellent 95% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 8.1% during the coming year according to the three analysts following the company. With the industry predicted to deliver 24% growth, the company is positioned for a weaker revenue result.

In light of this, it's curious that AInnovation Technology Group's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

AInnovation Technology Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look at the analysts forecasts of AInnovation Technology Group's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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.

Before you take the next step, you should know about the 3 warning signs for AInnovation Technology Group that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.