Despite an already strong run, GuoChuang Software Co.,Ltd. (SZSE:300520) shares have been powering on, with a gain of 35% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 6.4% isn't as attractive.

Even after such a large jump in price, GuoChuang SoftwareLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 4x, considering almost half of all companies in the Software industry in China have P/S ratios greater than 7.7x and even P/S higher than 13x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Has GuoChuang SoftwareLtd Performed Recently?

GuoChuang SoftwareLtd hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. 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.

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

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

Retrospectively, the last year delivered a frustrating 37% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 12% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 74% as estimated by the lone analyst watching the company. With the industry only predicted to deliver 33%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that GuoChuang SoftwareLtd's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Despite GuoChuang SoftwareLtd's share price climbing recently, its P/S still lags most other companies. 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.

GuoChuang SoftwareLtd's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for GuoChuang SoftwareLtd you should be aware of, and 1 of them shouldn't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.