Gosuncn Technology Group Co., Ltd.'s (SZSE:300098) price-to-sales (or "P/S") ratio of 3.8x might make it look like a buy right now compared to the Communications industry in China, where around half of the companies have P/S ratios above 4.9x and even P/S above 8x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Gosuncn Technology Group

How Has Gosuncn Technology Group Performed Recently?

With revenue that's retreating more than the industry's average of late, Gosuncn Technology Group has been very sluggish. Perhaps the market isn't expecting future revenue performance to improve, which has kept the P/S suppressed. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. Or at the very least, you'd be hoping the revenue slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

The only time you'd be truly comfortable seeing a P/S as low as Gosuncn Technology Group's is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. This means it has also seen a slide in revenue over the longer-term as revenue is down 6.7% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 41% over the next year. Meanwhile, the rest of the industry is forecast to expand by 44%, which is not materially different.

With this information, we find it odd that Gosuncn Technology Group 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.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've seen that Gosuncn Technology Group currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Gosuncn Technology Group 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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