Revenues Not Telling The Story For China Youzan Limited (HKG:8083)

When close to half the companies in the Software industry in Hong Kong have price-to-sales ratios (or "P/S") below 1.2x, you may consider China Youzan Limited (HKG:8083) as a stock to potentially avoid with its 1.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for China Youzan

What Does China Youzan's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, China Youzan's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. 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 China Youzan.

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

In order to justify its P/S ratio, China Youzan would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.8%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 15% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 8.1% during the coming year according to the five analysts following the company. That's shaping up to be materially lower than the 30% growth forecast for the broader industry.

In light of this, it's alarming that China Youzan'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.

The Bottom Line On China Youzan'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.

We've concluded that China Youzan currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

We don't want to rain on the parade too much, but we did also find 2 warning signs for China Youzan that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.