Newland Digital Technology Co.,Ltd. (SZSE:000997) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Although its price has surged higher, Newland Digital TechnologyLtd's price-to-sales (or "P/S") ratio of 2.5x might still make it look like a strong buy right now compared to the wider Software industry in China, where around half of the companies have P/S ratios above 5.3x and even P/S above 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

What Does Newland Digital TechnologyLtd's Recent Performance Look Like?

Newland Digital TechnologyLtd hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

How Is Newland Digital TechnologyLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Newland Digital TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 1.1% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 20% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 33% growth forecast for the broader industry.

In light of this, it's understandable that Newland Digital TechnologyLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Shares in Newland Digital TechnologyLtd have risen appreciably however, its P/S is still subdued. 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.

As we suspected, our examination of Newland Digital TechnologyLtd's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Newland Digital TechnologyLtd is showing 3 warning signs in our investment analysis, you should know about.

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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