When close to half the companies operating in the IT industry in Hong Kong have price-to-sales ratios (or "P/S") above 0.9x, you may consider Digital China Holdings Limited (HKG:861) as an attractive investment with its 0.2x 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.

How Has Digital China Holdings Performed Recently?

Recent revenue growth for Digital China Holdings has been in line with the industry. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. Those who are bullish on Digital China Holdings will be hoping that this isn't the case.

Is There Any Revenue Growth Forecasted For Digital China Holdings?

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

Retrospectively, the last year delivered a decent 8.4% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 11% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 10% per annum as estimated by the three analysts watching the company. With the industry predicted to deliver 8.5% growth per year, the company is positioned for a comparable revenue result.

With this information, we find it odd that Digital China Holdings is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Digital China Holdings' P/S?

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.

Our examination of Digital China Holdings' revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Digital China Holdings with six simple checks.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.