Despite an already strong run, Infotmic Co.,Ltd (SZSE:000670) shares have been powering on, with a gain of 32% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 2.2% isn't as impressive.

In spite of the firm bounce in price, InfotmicLtd's price-to-sales (or "P/S") ratio of 1.6x might still make it look like a strong buy right now compared to the wider Semiconductor industry in China, where around half of the companies have P/S ratios above 7.7x and even P/S above 14x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does InfotmicLtd's P/S Mean For Shareholders?

The revenue growth achieved at InfotmicLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. The strong recent performance means it was also able to grow revenue by 44% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 43% shows it's noticeably less attractive.

In light of this, it's understandable that InfotmicLtd's P/S sits below the majority of other companies. 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 Bottom Line On InfotmicLtd's P/S

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

As we suspected, our examination of InfotmicLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for InfotmicLtd (1 is concerning!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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