When you see that almost half of the companies in the Entertainment industry in Hong Kong have price-to-sales ratios (or "P/S") below 1.7x, Kingsoft Corporation Limited (HKG:3888) looks to be giving off some sell signals with its 3.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Kingsoft Has Been Performing

Recent times haven't been great for Kingsoft as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

How Is Kingsoft's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The latest three year period has also seen an excellent 45% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 17% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 18% each year, which is not materially different.

In light of this, it's curious that Kingsoft's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Kingsoft's P/S?

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Kingsoft currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Kingsoft with six simple checks on some of these key factors.

If you're unsure about the strength of Kingsoft's 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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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.

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