Zhuhai Comleader Information Science & Technology Co., Ltd. (SHSE:688175) shares have continued their recent momentum with a 32% gain in the last month alone. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, Zhuhai Comleader Information Science & Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 10.5x, since almost half of all companies in the Communications industry in China have P/S ratios under 5.5x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Zhuhai Comleader Information Science & Technology's P/S Mean For Shareholders?

For instance, Zhuhai Comleader Information Science & Technology's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Zhuhai Comleader Information Science & Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Zhuhai Comleader Information Science & Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Zhuhai Comleader Information Science & Technology'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 very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has lead to Zhuhai Comleader Information Science & Technology's P/S soaring as well. 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.

We've established that Zhuhai Comleader Information Science & Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 3 warning signs for Zhuhai Comleader Information Science & Technology (2 are potentially serious!) that you need to take into consideration.

If you're unsure about the strength of Zhuhai Comleader Information Science & Technology'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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