What Kingdee International Software Group Company Limited's (HKG:268) 26% Share Price Gain Is Not Telling You

Kingdee International Software Group Company Limited (HKG:268) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last month tops off a massive increase of 111% in the last year.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Software industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Kingdee International Software Group as a stock not worth researching with its 8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Kingdee International Software Group

How Kingdee International Software Group Has Been Performing

Kingdee International Software Group could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Kingdee International Software Group?

Kingdee International Software Group's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. This was backed up an excellent period prior to see revenue up by 50% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 15% each year over the next three years. That's shaping up to be materially lower than the 33% per year growth forecast for the broader industry.

In light of this, it's alarming that Kingdee International Software Group's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Kingdee International Software Group's P/S?

Kingdee International Software Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that Kingdee International Software Group currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Kingdee International Software Group with six simple checks on some of these key factors.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.