AInnovation Technology Group Co., Ltd (HKG:2121)’s popularity among investors is threatened by overpricing

With an average price-to-sales (or “P/S”) ratio of close to 1.3x in the Hong Kong software industry, you could be forgiven for feeling indifferent about AInnovation Technology Group Co., Ltd. (HKG:2121) P/S ratio, which comes out to about the same. However, investors may be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for AInnovation Technology Group

How is AInnovation Technology Group performing recently?

With revenue growth that outpaces most other companies lately, AInnovation Technology Group has been doing relatively well. Perhaps the market is expecting this level of performance to slow down, preventing the P/S from rising. If you like the company, you’d hope that this isn’t the case so that you could potentially buy some shares while they’re not in great favor.

Want to know how analysts think the future of AInnovation Technology Group compares to the industry? If so, our free The report is a great place to start.

What do revenue growth metrics tell us about P/S?

The only time you’d feel comfortable seeing a P/S like AInnovation Technology Group’s is when the company’s growth closely tracks that of the industry.

Looking back, the last year delivered a decent 12% gain to the company’s revenues. This was backed up by an excellent previous period to see revenue increase by 279% in total over the last three years. So it’s fair to say that revenue growth recently has been excellent for the company.

Turning to the outlook, the next three years should yield 13% growth each year, as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand at 21% per year, which is notably more attractive.

Given this information, we find it interesting that AInnovation Technology Group is trading at a fairly similar P/S compared to its industry. It appears that many investors in the company are less bearish than analysts indicate and are not willing to part with their shares right now. Sustaining these prices will be difficult to achieve, as this level of revenue growth will likely weigh on the stock eventually.

The Final Result of AInnovation Technology Group’s P/S

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.

When you consider that AInnovation Technology Group’s revenue growth estimates are quite moderate compared to the broader industry, it’s easy to see why we consider it unexpected to trade at its current P/S ratio. We are not confident in the P/S at this time, as forecasted future revenues are unlikely to support more positive sentiment for a long time. A positive move is needed to justify the current price-to-sales ratio.

Don’t forget that there may be other risks. For example, we have identified 3 Warning Signs for AInnovation Technology Group that you should be aware of.

Clear, profitable companies with a history of strong earnings growth are generally safer bets. Then you might want to see this free set of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or financial situation. Our aim is to bring you long-term focused analysis, driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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