Improved Revenues Required Before OneConnect Financial Technology Co., Ltd. (HKG:6638) Shares Find Their Feet

OneConnect Financial Technology Co., Ltd.'s (HKG:6638) price-to-sales (or "P/S") ratio of 0.1x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Software industry in Hong Kong have P/S ratios greater than 1.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for OneConnect Financial Technology

How OneConnect Financial Technology Has Been Performing

While the industry has experienced revenue growth lately, OneConnect Financial Technology's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, OneConnect Financial Technology would need to produce sluggish growth that's trailing the industry.

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 19%. As a result, revenue from three years ago have also fallen 1.5% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 20% as estimated by the two analysts watching the company. With the industry predicted to deliver 21% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that OneConnect Financial Technology's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From OneConnect Financial Technology's P/S?

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.

As we suspected, our examination of OneConnect Financial Technology's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

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

If you're unsure about the strength of OneConnect Financial Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com