You may think that with a price-to-sales (or "P/S") ratio of 12.8x Trust Alliance Information Development Inc.Ltd.Shanghai (SZSE:300469) is a stock to avoid completely, seeing as almost half of all the IT companies in China have P/S ratios under 4.3x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Trust Alliance Information DevelopmentLtd.Shanghai

How Has Trust Alliance Information DevelopmentLtd.Shanghai Performed Recently?

Trust Alliance Information DevelopmentLtd.Shanghai has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

The only time you'd be truly comfortable seeing a P/S as steep as Trust Alliance Information DevelopmentLtd.Shanghai's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 53% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 48% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Trust Alliance Information DevelopmentLtd.Shanghai is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Trust Alliance Information DevelopmentLtd.Shanghai's P/S?

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.

Our examination of Trust Alliance Information DevelopmentLtd.Shanghai revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Trust Alliance Information DevelopmentLtd.Shanghai (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.