When you see that almost half of the companies in the Software industry in China have price-to-sales ratios (or "P/S") below 5.8x, Transwarp Technology (Shanghai) Co.,Ltd. (SHSE:688031) looks to be giving off strong sell signals with its 15.1x 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.

Check out our latest analysis for Transwarp Technology (Shanghai)Ltd

What Does Transwarp Technology (Shanghai)Ltd's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Transwarp Technology (Shanghai)Ltd has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Transwarp Technology (Shanghai)Ltd's Revenue Growth Trending?

In order to justify its P/S ratio, Transwarp Technology (Shanghai)Ltd would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. The strong recent performance means it was also able to grow revenue by 63% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 63% over the next year. With the industry only predicted to deliver 36%, the company is positioned for a stronger revenue result.

With this information, we can see why Transwarp Technology (Shanghai)Ltd is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Transwarp Technology (Shanghai)Ltd's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look into Transwarp Technology (Shanghai)Ltd shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Transwarp Technology (Shanghai)Ltd you should be aware of, and 1 of them doesn't sit too well with us.

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).

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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.