Shanghai Newtouch Software Co., Ltd. (SHSE:688590) shares have had a really impressive month, gaining 50% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Even after such a large jump in price, Shanghai Newtouch Software's price-to-sales (or "P/S") ratio of 2x might still make it look like a strong buy right now compared to the wider IT industry in China, where around half of the companies have P/S ratios above 4.1x and even P/S above 9x 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 so limited.

How Shanghai Newtouch Software Has Been Performing

Shanghai Newtouch Software certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. 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.

Is There Any Revenue Growth Forecasted For Shanghai Newtouch Software?

The only time you'd be truly comfortable seeing a P/S as depressed as Shanghai Newtouch Software's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered an exceptional 31% gain to the company's top line. Pleasingly, revenue has also lifted 65% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 21% shows it's noticeably less attractive.

With this information, we can see why Shanghai Newtouch Software is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Even after such a strong price move, Shanghai Newtouch Software's P/S still trails the rest of the industry. 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.

Our examination of Shanghai Newtouch Software confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Shanghai Newtouch Software is showing 5 warning signs in our investment analysis, and 4 of those are concerning.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.