Despite an already strong run, Anacle Systems Limited (HKG:8353) shares have been powering on, with a gain of 33% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

Although its price has surged higher, given about half the companies operating in Hong Kong's Software industry have price-to-sales ratios (or "P/S") above 1.7x, you may still consider Anacle Systems as an attractive investment with its 1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Anacle Systems' P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Anacle Systems has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Anacle Systems will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For Anacle Systems?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Anacle Systems' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 36%. Revenue has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Anacle Systems is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Final Word

The latest share price surge wasn't enough to lift Anacle Systems' P/S close to the industry median. 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.

As we suspected, our examination of Anacle Systems revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You should always think about risks. Case in point, we've spotted 2 warning signs for Anacle Systems you should be aware of.

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.