Sangfor Technologies Inc. (SZSE:300454) shareholders would be excited to see that the share price has had a great month, posting a 56% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 25% in the last twelve months.

Even after such a large jump in price, Sangfor Technologies' price-to-sales (or "P/S") ratio of 3.9x might still make it look like a buy right now compared to the Software industry in China, where around half of the companies have P/S ratios above 5.8x and even P/S above 11x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Sangfor Technologies' Recent Performance Look Like?

Sangfor Technologies could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still 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.

Is There Any Revenue Growth Forecasted For Sangfor Technologies?

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

Retrospectively, the last year delivered a frustrating 1.3% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 21% per annum, which is noticeably less attractive.

With this information, we find it odd that Sangfor Technologies is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

The latest share price surge wasn't enough to lift Sangfor Technologies' P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Sangfor Technologies' analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It is also worth noting that we have found 3 warning signs for Sangfor Technologies that you need to take into consideration.

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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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.