Despite an already strong run, Shenzhen Ysstech Info-Tech Co.,Ltd (SZSE:300377) shares have been powering on, with a gain of 134% in the last thirty days. The annual gain comes to 233% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in China's Software industry have price-to-sales ratios (or "P/S") below 7.4x, you may consider Shenzhen Ysstech Info-TechLtd as a stock to avoid entirely with its 15.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Shenzhen Ysstech Info-TechLtd's P/S Mean For Shareholders?

For example, consider that Shenzhen Ysstech Info-TechLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Shenzhen Ysstech Info-TechLtd's Revenue Growth Trending?

Shenzhen Ysstech Info-TechLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 5.1% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 63% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 33% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Shenzhen Ysstech Info-TechLtd's P/S sits above the majority of other companies. 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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Shenzhen Ysstech Info-TechLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Shenzhen Ysstech Info-TechLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - Shenzhen Ysstech Info-TechLtd has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you're unsure about the strength of Shenzhen Ysstech Info-TechLtd'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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