The Jilin University Zhengyuan Information Technologies Co., Ltd. (SZSE:003029) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Although its price has dipped substantially, Jilin University Zhengyuan Information Technologies' price-to-sales (or "P/S") ratio of 9.4x might still make it look like a strong sell right now compared to other companies in the Software industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Jilin University Zhengyuan Information Technologies Performed Recently?

For instance, Jilin University Zhengyuan Information Technologies' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Jilin University Zhengyuan Information Technologies' Revenue Growth Trending?

In order to justify its P/S ratio, Jilin University Zhengyuan Information Technologies would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 36% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 30% shows it's an unpleasant look.

With this information, we find it concerning that Jilin University Zhengyuan Information Technologies 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.

The Final Word

A significant share price dive has done very little to deflate Jilin University Zhengyuan Information Technologies' very lofty P/S. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Jilin University Zhengyuan Information Technologies 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 2 warning signs for Jilin University Zhengyuan Information Technologies (1 is concerning!) that we have uncovered.

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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