Bingo Software Co., Ltd. (SHSE:688227) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

Although its price has surged higher, Bingo Software may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.8x, since almost half of all companies in the Software industry in China have P/S ratios greater than 5.2x and even P/S higher than 9x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Bingo Software's P/S Mean For Shareholders?

The revenue growth achieved at Bingo Software over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. 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 out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Bingo Software would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 9.7% gain to the company's revenues. Revenue has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Bingo Software 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 Does Bingo Software's P/S Mean For Investors?

Bingo Software's stock price has surged recently, but its but its P/S still remains modest. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Bingo Software revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Bingo Software.

If these risks are making you reconsider your opinion on Bingo Software, explore our interactive list of high quality stocks to get an idea of what else is out there.

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