With a median price-to-sales (or “P/S”) ratio of close to 4.4x in the Software industry in China, you could be forgiven for feeling indifferent about Servyou Software Group Co., Ltd.’s (SHSE:603171) P/S ratio of 4.5x. Although, it’s not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Servyou Software Group

What Does Servyou Software Group’s P/S Mean For Shareholders?

Recent times have been advantageous for Servyou Software Group as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If you like the company, you’d be hoping this isn’t the case so that you could potentially pick up some stock while it’s not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on Servyou Software Group will help you uncover what’s on the horizon.

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

In order to justify its P/S ratio, Servyou Software Group would need to produce growth that’s similar to the industry.

Retrospectively, the last year delivered a decent 7.6% gain to the company’s revenues. Revenue has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 21% over the next year. With the industry predicted to deliver 30% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Servyou Software Group’s P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

We’d say the price-to-sales ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

When you consider that Servyou Software Group’s revenue growth estimates are fairly muted compared to the broader industry, it’s easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example – Servyou Software Group has 2 warning signs we think you should be aware of.

If you’re unsure about the strength of Servyou Software Group’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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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.