Transportation Telecommunication & Information Development Inc.Ltd.Zhejiang (SZSE:300469) shares have retraced a considerable 32% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 56%, which is great even in a bull market.

Although its price has dipped substantially, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's price-to-sales (or "P/S") ratio of 20.9x might still make it look like a strong sell right now compared to other companies in the IT industry in China, where around half of the companies have P/S ratios below 4.3x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Has Transportation Telecommunication & Information DevelopmentLtd.Zhejiang Performed Recently?

For instance, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

Transportation Telecommunication & Information DevelopmentLtd.Zhejiang'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 2.2% decrease to the company's top line. As a result, revenue from three years ago have also fallen 44% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 18% 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 Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

Even after such a strong price drop, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Transportation Telecommunication & Information DevelopmentLtd.Zhejiang revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

You always need to take note of risks, for example - Transportation Telecommunication & Information DevelopmentLtd.Zhejiang has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Transportation Telecommunication & Information DevelopmentLtd.Zhejiang, explore our interactive list of high quality stocks to get an idea of what else is out there.

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