What Newlink Technology Inc.'s (HKG:9600) 39% Share Price Gain Is Not Telling You

Newlink Technology Inc. (HKG:9600) shareholders are no doubt pleased to see that the share price has bounced 39% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 30%.

Since its price has surged higher, when almost half of the companies in Hong Kong's IT industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Newlink Technology as a stock not worth researching with its 6.5x 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 so lofty.

See our latest analysis for Newlink Technology

What Does Newlink Technology's P/S Mean For Shareholders?

For instance, Newlink Technology's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Newlink Technology's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Newlink Technology?

The only time you'd be truly comfortable seeing a P/S as steep as Newlink Technology's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.8%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 39% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Newlink Technology's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

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

Shares in Newlink Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Newlink Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Newlink Technology (2 are a bit unpleasant) you should be aware of.

If these risks are making you reconsider your opinion on Newlink 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.