With a median price-to-sales (or "P/S") ratio of close to 4.7x in the Software industry in China, you could be forgiven for feeling indifferent about iFLYTEK CO.,LTD's (SZSE:002230) P/S ratio of 4.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does iFLYTEKLTD's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, iFLYTEKLTD has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is iFLYTEKLTD's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like iFLYTEKLTD's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 45% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 20% per annum over the next three years. That's shaping up to be similar to the 21% each year growth forecast for the broader industry.

With this in mind, it makes sense that iFLYTEKLTD's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

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.

We've seen that iFLYTEKLTD maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Having said that, be aware iFLYTEKLTD is showing 1 warning sign in our investment analysis, you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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