Despite an already strong run, Allwin Telecommunication Co., Ltd. (SZSE:002231) shares have been powering on, with a gain of 42% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

In spite of the firm bounce in price, it's still not a stretch to say that Allwin Telecommunication's price-to-sales (or "P/S") ratio of 4.6x right now seems quite "middle-of-the-road" compared to the Communications industry in China, where the median P/S ratio is around 4.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Allwin Telecommunication's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Allwin Telecommunication has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 134% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 3.1% drop in revenue in aggregate. 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 43% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Allwin Telecommunication is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Its shares have lifted substantially and now Allwin Telecommunication's P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We find it unexpected that Allwin Telecommunication trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Allwin Telecommunication that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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