The Shanghai DragonNet Technology Co.,Ltd. (SZSE:300245) share price has done very well over the last month, posting an excellent gain of 46%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.
Since its price has surged higher, when almost half of the companies in China's IT industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Shanghai DragonNet TechnologyLtd as a stock not worth researching with its 5.7x 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.
What Does Shanghai DragonNet TechnologyLtd's P/S Mean For Shareholders?
As an illustration, revenue has deteriorated at Shanghai DragonNet TechnologyLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shanghai DragonNet TechnologyLtd's earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The High P/S?
The only time you'd be truly comfortable seeing a P/S as steep as Shanghai DragonNet TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. The last three years don't look nice either as the company has shrunk revenue by 19% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
In contrast to the company, the rest of the industry is expected to grow by 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this information, we find it concerning that Shanghai DragonNet TechnologyLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
The Bottom Line On Shanghai DragonNet TechnologyLtd's P/S
Shares in Shanghai DragonNet TechnologyLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Shanghai DragonNet TechnologyLtd that you should be aware of.
If you're unsure about the strength of Shanghai DragonNet TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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考虑到这一点,我们发现Futong Technology Development Holdings的市销率超过了同行业的同行。这似乎是因为大多数投资者并未关注最近的营收增长率,并希望公司的业务前景能够好转。只有最勇敢的人才会假定这些价格是可持续的,因为最近的营收趋势的延续很可能会给股价带来沉重的打击。