Unfortunately for some shareholders, the QingCloud Technologies Corp. (SHSE:688316) share price has dived 30% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 52% share price decline.

Even after such a large drop in price, given close to half the companies operating in China's IT industry have price-to-sales ratios (or "P/S") below 3.2x, you may still consider QingCloud Technologies as a stock to potentially avoid with its 4x 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 as high as it is.

What Does QingCloud Technologies' P/S Mean For Shareholders?

The revenue growth achieved at QingCloud Technologies 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for QingCloud Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For QingCloud Technologies?

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

If we review the last year of revenue growth, the company posted a worthy increase of 9.9%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 22% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 40% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that QingCloud Technologies' P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does QingCloud Technologies' P/S Mean For Investors?

There's still some elevation in QingCloud Technologies' P/S, even if the same can't be said for its share price recently. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that QingCloud Technologies currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You should always think about risks. Case in point, we've spotted 2 warning signs for QingCloud Technologies you should be aware of, and 1 of them is a bit unpleasant.

If these risks are making you reconsider your opinion on QingCloud Technologies, 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.