Linklogis Inc. (HKG:9959) shares have had a horrible month, losing 26% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.
In spite of the heavy fall in price, given close to half the companies operating in Hong Kong's Software industry have price-to-sales ratios (or "P/S") below 1.6x, you may still consider Linklogis as a stock to potentially avoid with its 2.9x 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.
View our latest analysis for Linklogis
How Linklogis Has Been Performing
Linklogis' revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Linklogis.What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Linklogis would need to produce impressive growth in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 13% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Looking ahead now, revenue is anticipated to climb by 13% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 23%, which is noticeably more attractive.
With this in consideration, we believe it doesn't make sense that Linklogis' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
What Does Linklogis' P/S Mean For Investors?
Linklogis' P/S remain high even after its stock plunged. 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.
Despite analysts forecasting some poorer-than-industry revenue growth figures for Linklogis, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Linklogis you should know about.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.