When close to half the companies in the Software industry in China have price-to-sales ratios (or "P/S") below 6.6x, you may consider Fujian Foxit Software Development Joint Stock Co., Ltd. (SHSE:688095) as a stock to avoid entirely with its 11.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Fujian Foxit Software Development

What Does Fujian Foxit Software Development's Recent Performance Look Like?

Fujian Foxit Software Development's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Fujian Foxit Software Development's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Fujian Foxit Software Development's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.6% last year. The solid recent performance means it was also able to grow revenue by 29% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 14% over the next year. With the industry predicted to deliver 37% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Fujian Foxit Software Development's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

It comes as a surprise to see Fujian Foxit Software Development trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Fujian Foxit Software Development has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.