Those holding Xuan Wu Cloud Technology Holdings Limited (HKG:2392) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 75% share price decline over the last year.

Although its price has surged higher, considering around half the companies operating in Hong Kong's Software industry have price-to-sales ratios (or "P/S") above 1.3x, you may still consider Xuan Wu Cloud Technology Holdings as an solid investment opportunity with its 0.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Xuan Wu Cloud Technology Holdings' Recent Performance Look Like?

The revenue growth achieved at Xuan Wu Cloud Technology Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Xuan Wu Cloud Technology Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 61% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 20% shows it's noticeably less attractive.

With this information, we can see why Xuan Wu Cloud Technology Holdings is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Xuan Wu Cloud Technology Holdings' P/S?

The latest share price surge wasn't enough to lift Xuan Wu Cloud Technology Holdings' P/S close to the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Xuan Wu Cloud Technology Holdings revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You should always think about risks. Case in point, we've spotted 4 warning signs for Xuan Wu Cloud Technology Holdings you should be aware of, and 2 of them are a bit unpleasant.

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

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