The AInnovation Technology Group Co., Ltd (HKG:2121) share price has fared very poorly over the last month, falling by a substantial 33%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 46% in that time.
After such a large drop in price, AInnovation Technology Group may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.6x, considering almost half of all companies in the Software industry in Hong Kong have P/S ratios greater than 2.2x and even P/S higher than 6x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
See our latest analysis for AInnovation Technology Group
How AInnovation Technology Group Has Been Performing
AInnovation Technology Group hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.
Keen to find out how analysts think AInnovation Technology Group's future stacks up against the industry? In that case, our free report is a great place to start.Is There Any Revenue Growth Forecasted For AInnovation Technology Group?
There's an inherent assumption that a company should underperform the industry for P/S ratios like AInnovation Technology Group's to be considered reasonable.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. Even so, admirably revenue has lifted 95% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.
Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 5.9% as estimated by the three analysts watching the company. Meanwhile, the broader industry is forecast to expand by 22%, which paints a poor picture.
With this in consideration, we find it intriguing that AInnovation Technology Group's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
The Final Word
AInnovation Technology Group's recently weak share price has pulled its P/S back below other Software companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
With revenue forecasts that are inferior to the rest of the industry, it's no surprise that AInnovation Technology Group's P/S is on the lower end of the spectrum. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with AInnovation Technology Group (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.
If you're unsure about the strength of AInnovation Technology Group'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.