You may think that with a price-to-sales (or "P/S") ratio of 4.1x Shenzhen Ysstech Info-Tech Co.,Ltd (SZSE:300377) is a stock worth checking out, seeing as almost half of all the Software companies in China have P/S ratios greater than 6.4x and even P/S higher than 11x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Ysstech Info-TechLtd

What Does Shenzhen Ysstech Info-TechLtd's Recent Performance Look Like?

Revenue has risen firmly for Shenzhen Ysstech Info-TechLtd recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Shenzhen Ysstech Info-TechLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Shenzhen Ysstech Info-TechLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Shenzhen Ysstech Info-TechLtd would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. The latest three year period has also seen an excellent 117% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Shenzhen Ysstech Info-TechLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Shenzhen Ysstech Info-TechLtd's P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shenzhen Ysstech Info-TechLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. 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 3 warning signs for Shenzhen Ysstech Info-TechLtd (2 are concerning!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.