Zhongtong Guomai Communication Co., Ltd. (SHSE:603559) shares have continued their recent momentum with a 63% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

Although its price has surged higher, there still wouldn't be many who think Zhongtong Guomai Communication's price-to-sales (or "P/S") ratio of 4.7x is worth a mention when the median P/S in China's IT industry is similar at about 5.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Zhongtong Guomai Communication's P/S Mean For Shareholders?

Zhongtong Guomai Communication has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Zhongtong Guomai Communication will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Zhongtong Guomai Communication would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 26% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues 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 Zhongtong Guomai Communication is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does Zhongtong Guomai Communication's P/S Mean For Investors?

Zhongtong Guomai Communication's stock has a lot of momentum behind it lately, which has brought its P/S level with 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 look at Zhongtong Guomai Communication revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Zhongtong Guomai Communication that you need to take into consideration.

If you're unsure about the strength of Zhongtong Guomai Communication'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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