Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 17% in that time.

Although its price has dipped substantially, given close to half the companies operating in China's Software industry have price-to-sales ratios (or "P/S") below 5.1x, you may still consider Hangzhou Raycloud TechnologyLtd as a stock to potentially avoid with its 7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Hangzhou Raycloud TechnologyLtd

How Has Hangzhou Raycloud TechnologyLtd Performed Recently?

Hangzhou Raycloud TechnologyLtd hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Hangzhou Raycloud TechnologyLtd?

In order to justify its P/S ratio, Hangzhou Raycloud TechnologyLtd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 7.5% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 2.6% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 29% as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 35% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Hangzhou Raycloud TechnologyLtd's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Hangzhou Raycloud TechnologyLtd's P/S Mean For Investors?

Hangzhou Raycloud TechnologyLtd's P/S remain high even after its stock plunged. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It comes as a surprise to see Hangzhou Raycloud TechnologyLtd trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hangzhou Raycloud TechnologyLtd you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.