Hangzhou Hopechart IoT Technology Co.,Ltd (SHSE:688288) shares have had a really impressive month, gaining 48% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Although its price has surged higher, Hangzhou Hopechart IoT TechnologyLtd may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.7x, since almost half of all companies in the Software industry in China have P/S ratios greater than 5.8x and even P/S higher than 11x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Hangzhou Hopechart IoT TechnologyLtd's P/S Mean For Shareholders?

Recent times have been quite advantageous for Hangzhou Hopechart IoT TechnologyLtd as its revenue has been rising very briskly. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Hangzhou Hopechart IoT TechnologyLtd's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 66% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 5.3% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 26% shows it's an unpleasant look.

With this information, we are not surprised that Hangzhou Hopechart IoT TechnologyLtd is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

Despite Hangzhou Hopechart IoT TechnologyLtd's share price climbing recently, its P/S still lags most other companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Hangzhou Hopechart IoT TechnologyLtd revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Hangzhou Hopechart IoT TechnologyLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Hangzhou Hopechart IoT TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.