Despite an already strong run, Great Chinasoft Technology Co.,Ltd. (SZSE:002453) shares have been powering on, with a gain of 48% 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 31% over that time.

Since its price has surged higher, when almost half of the companies in China's Software industry have price-to-sales ratios (or "P/S") below 6.5x, you may consider Great Chinasoft TechnologyLtd as a stock not worth researching with its 10.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Great Chinasoft TechnologyLtd's P/S Mean For Shareholders?

Great Chinasoft TechnologyLtd has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Great Chinasoft TechnologyLtd?

The only time you'd be truly comfortable seeing a P/S as steep as Great Chinasoft TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 84% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 33% 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 Great Chinasoft TechnologyLtd's 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. 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.

What We Can Learn From Great Chinasoft TechnologyLtd's P/S?

The strong share price surge has lead to Great Chinasoft TechnologyLtd's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Great Chinasoft TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. 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.

It is also worth noting that we have found 2 warning signs for Great Chinasoft TechnologyLtd (1 shouldn't be ignored!) that you need to take into consideration.

If you're unsure about the strength of Great Chinasoft TechnologyLtd'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.