International Business Digital Technology Limited (HKG:1782) shares have had a horrible month, losing 31% after a relatively good period beforehand.    Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 135% in the last twelve months.  

In spite of the heavy fall in price, given around half the companies in Hong Kong's IT industry have price-to-sales ratios (or "P/S") below 1.1x, you may still consider International Business Digital Technology as a stock to avoid entirely with its 32.8x P/S ratio.   Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.  

Check out our latest analysis for International Business Digital Technology

SEHK:1782 Price to Sales Ratio vs Industry January 30th 2024

How International Business Digital Technology Has Been Performing

As an illustration, revenue has deteriorated at International Business Digital Technology over the last year, which is not ideal at all.   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.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on International Business Digital Technology's earnings, revenue and cash flow.  

Do Revenue Forecasts Match The High P/S Ratio?  

There's an inherent assumption that a company should far outperform the industry for P/S ratios like International Business Digital Technology's to be considered reasonable.  

Retrospectively, the last year delivered a frustrating 7.3% decrease to the company's top line.   This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.9% overall rise in revenue.  So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.  

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that International Business Digital Technology's P/S exceeds that of its industry peers.  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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.  

What We Can Learn From International Business Digital Technology's P/S?

Even after such a strong price drop, International Business Digital Technology's P/S still exceeds the industry median significantly.      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.

Our examination of International Business Digital Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations.  Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long.  Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for International Business Digital Technology (1 is a bit concerning!) that you need to be mindful of.  

If these risks are making you reconsider your opinion on International Business Digital Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.