Unfortunately for some shareholders, the Hillstone Networks Co.,Ltd. (SHSE:688030) share price has dived 26% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 55% loss during that time.

Following the heavy fall in price, Hillstone NetworksLtd may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.1x, considering almost half of all companies in the IT industry in China have P/S ratios greater than 3.2x and even P/S higher than 7x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Hillstone NetworksLtd's P/S Mean For Shareholders?

Recent times have been advantageous for Hillstone NetworksLtd as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hillstone NetworksLtd.

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

Hillstone NetworksLtd's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. The solid recent performance means it was also able to grow revenue by 24% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 21% per year as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this information, we find it odd that Hillstone NetworksLtd is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Hillstone NetworksLtd's P/S has taken a dip along with its share price. 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.

Hillstone NetworksLtd's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Hillstone NetworksLtd with six simple checks on some of these key factors.

If you're unsure about the strength of Hillstone NetworksLtd'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.