Shanghai DragonNet Technology Co.,Ltd. (SZSE:300245) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Shanghai DragonNet TechnologyLtd's price-to-sales (or "P/S") ratio of 3.4x is worth a mention when the median P/S in China's IT industry is similar at about 3.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Shanghai DragonNet TechnologyLtd

What Does Shanghai DragonNet TechnologyLtd's Recent Performance Look Like?

Shanghai DragonNet TechnologyLtd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Shanghai DragonNet TechnologyLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

Retrospectively, the last year delivered a decent 8.4% gain to the company's revenues. The latest three year period has also seen an excellent 35% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 45% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Shanghai DragonNet TechnologyLtd's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Shanghai DragonNet TechnologyLtd looks to be in line with the rest of the IT industry. 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.

Our examination of Shanghai DragonNet TechnologyLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shanghai DragonNet TechnologyLtd you should be aware of.

If these risks are making you reconsider your opinion on Shanghai DragonNet TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.