Investors Don't See Light At End Of Xuan Wu Cloud Technology Holdings Limited's (HKG:2392) Tunnel And Push Stock Down 28%

Xuan Wu Cloud Technology Holdings Limited (HKG:2392) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 49% in the last year.

After such a large drop in price, Xuan Wu Cloud Technology Holdings' price-to-sales (or "P/S") ratio of 0.7x might make it look like a strong buy right now compared to the wider Software industry in Hong Kong, where around half of the companies have P/S ratios above 2.9x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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Check out our latest analysis for Xuan Wu Cloud Technology Holdings

What Does Xuan Wu Cloud Technology Holdings' P/S Mean For Shareholders?

For example, consider that Xuan Wu Cloud Technology Holdings' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Xuan Wu Cloud Technology Holdings will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Xuan Wu Cloud Technology Holdings?

The only time you'd be truly comfortable seeing a P/S as depressed as Xuan Wu Cloud Technology Holdings' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 10% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 35% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Xuan Wu Cloud Technology Holdings' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Xuan Wu Cloud Technology Holdings' P/S Mean For Investors?

Shares in Xuan Wu Cloud Technology Holdings have plummeted and its P/S has followed suit. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It's no surprise that Xuan Wu Cloud Technology Holdings maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Xuan Wu Cloud Technology Holdings (1 is a bit concerning!) that you need to take into consideration.

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.