The CloudWalk Technology Co., Ltd. (SHSE:688327) share price has fared very poorly over the last month, falling by a substantial 25%. For any long-term shareholders, the last month ends a year to forget by locking in a 63% share price decline.

Although its price has dipped substantially, you could still be forgiven for thinking CloudWalk Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 18.6x, considering almost half the companies in China's Software industry have P/S ratios below 4.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does CloudWalk Technology's P/S Mean For Shareholders?

The revenue growth achieved at CloudWalk Technology over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be 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.

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 CloudWalk Technology's earnings, revenue and cash flow.

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

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

If we review the last year of revenue growth, the company posted a terrific increase of 19%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 17% drop in revenue in aggregate. 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 28% 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 CloudWalk 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 Bottom Line On CloudWalk Technology's P/S

Even after such a strong price drop, CloudWalk Technology's P/S still exceeds the industry median significantly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that CloudWalk 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for CloudWalk Technology (1 is significant) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.