Fujian Foxit Software Development Joint Stock Co., Ltd. (SHSE:688095) shareholders that were waiting for something to happen have been dealt a blow with a 30% 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 17% share price drop.

In spite of the heavy fall in price, Fujian Foxit Software Development may still be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 7x, since almost half of all companies in the Software in China have P/S ratios under 4.7x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Fujian Foxit Software Development Has Been Performing

Fujian Foxit Software Development's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

Fujian Foxit Software Development's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a decent 4.6% gain to the company's revenues. Revenue has also lifted 29% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 14% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 35% growth forecast for the broader industry.

With this information, we find it concerning that Fujian Foxit Software Development is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

There's still some elevation in Fujian Foxit Software Development's P/S, even if the same can't be said for its share price recently. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Fujian Foxit Software Development, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Fujian Foxit Software Development you should be aware of, and 1 of them makes us a bit uncomfortable.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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