Why Investors Shouldn't Be Surprised By OneConnect Financial Technology Co., Ltd.'s (HKG:6638) 25% Share Price Plunge

The OneConnect Financial Technology Co., Ltd. (HKG:6638) share price has fared very poorly over the last month, falling by a substantial 25%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 73% loss during that time.

Since its price has dipped substantially, considering around half the companies operating in Hong Kong's Software industry have price-to-sales ratios (or "P/S") above 1.1x, you may consider OneConnect Financial Technology as an solid investment opportunity with its 0.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for OneConnect Financial Technology

What Does OneConnect Financial Technology's Recent Performance Look Like?

While the industry has experienced revenue growth lately, OneConnect Financial Technology's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still 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.

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

Is There Any Revenue Growth Forecasted For OneConnect Financial Technology?

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

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. Even so, admirably revenue has lifted 32% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 3.1% as estimated by the four analysts watching the company. With the industry predicted to deliver 22% growth, that's a disappointing outcome.

With this information, we are not surprised that OneConnect Financial Technology is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

OneConnect Financial Technology's recently weak share price has pulled its P/S back below other Software companies. 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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that OneConnect Financial Technology's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with OneConnect Financial Technology.

If these risks are making you reconsider your opinion on OneConnect Financial Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.