Hangzhou Arcvideo Technology Co., Ltd. (SHSE:688039) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.4% over the last year.

After such a large jump in price, you could be forgiven for thinking Hangzhou Arcvideo Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.6x, considering almost half the companies in China's Software industry have P/S ratios below 5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Hangzhou Arcvideo Technology's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Hangzhou Arcvideo Technology's revenue has gone into reverse gear, which is not great. 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.

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

Hangzhou Arcvideo Technology's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 39%. The last three years don't look nice either as the company has shrunk revenue by 8.8% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 51% during the coming year according to the one analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 34%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Hangzhou Arcvideo Technology's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Hangzhou Arcvideo Technology's P/S Mean For Investors?

Hangzhou Arcvideo Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 established that Hangzhou Arcvideo Technology maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hangzhou Arcvideo Technology that 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.