Those holding Hangzhou Anysoft Information Technology Co., Ltd. (SZSE:300571) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Although its price has surged higher, Hangzhou Anysoft Information Technology may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.2x, since almost half of all companies in the Communications industry in China have P/S ratios greater than 4.5x and even P/S higher than 8x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

How Hangzhou Anysoft Information Technology Has Been Performing

For example, consider that Hangzhou Anysoft Information Technology's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Hangzhou Anysoft Information Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Hangzhou Anysoft Information Technology would need to produce anemic growth that's substantially trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 58%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.4% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 51% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Hangzhou Anysoft Information Technology's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Hangzhou Anysoft Information Technology's recent share price jump still sees fails to bring its P/S alongside the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Hangzhou Anysoft Information Technology revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Hangzhou Anysoft Information Technology (of which 1 is potentially serious!) you should know about.

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

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