Hangzhou Raycloud Technology Co.,Ltd (SHSE:688365) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 60% share price drop in the last twelve months.

Following the firm bounce in price, given close to half the companies operating in China's Software industry have price-to-sales ratios (or "P/S") below 5.2x, you may consider Hangzhou Raycloud TechnologyLtd as a stock to potentially avoid with its 7.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Hangzhou Raycloud TechnologyLtd Performed Recently?

While the industry has experienced revenue growth lately, Hangzhou Raycloud TechnologyLtd's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Hangzhou Raycloud TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Hangzhou Raycloud TechnologyLtd would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.2%. The last three years don't look nice either as the company has shrunk revenue by 6.4% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 34% over the next year. Meanwhile, the rest of the industry is forecast to expand by 33%, which is not materially different.

In light of this, it's curious that Hangzhou Raycloud TechnologyLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

Hangzhou Raycloud TechnologyLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Analysts are forecasting Hangzhou Raycloud TechnologyLtd's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Before you settle on your opinion, we've discovered 1 warning sign for Hangzhou Raycloud TechnologyLtd that you should be aware of.

If you're unsure about the strength of Hangzhou Raycloud TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.