Despite an already strong run, Yuxing InfoTech Investment Holdings Limited (HKG:8005) shares have been powering on, with a gain of 29% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

After such a large jump in price, you could be forgiven for thinking Yuxing InfoTech Investment Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.8x, considering almost half the companies in Hong Kong's Consumer Durables industry have P/S ratios below 0.4x. 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 Yuxing InfoTech Investment Holdings' P/S Mean For Shareholders?

For instance, Yuxing InfoTech Investment Holdings' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Yuxing InfoTech Investment Holdings?

Yuxing InfoTech Investment Holdings' 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.

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 14%. This means it has also seen a slide in revenue over the longer-term as revenue is down 37% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Yuxing InfoTech Investment Holdings' P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Shares in Yuxing InfoTech Investment Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Yuxing InfoTech Investment Holdings 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Yuxing InfoTech Investment Holdings (1 is significant) you should be aware of.

If you're unsure about the strength of Yuxing InfoTech Investment Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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