Ruihe Data Technology Holdings (HKG:3680) shares may have fallen 27%, but it’s still hard to buy cheap

To the dismay of some shareholders, Zuiwa Data Technology Holdings (HKG:3680) shares have fallen 27% in the last month, making for a terrible time for the company. Looking back over the past 12 months, however, the stock has performed strongly, rising 23%.

With almost half of the companies in Hong Kong’s IT industry trading at a price-to-sales (P/S) ratio below 1.1x, even after such a large drop in its share price, Ruihe Data Technology Holdings’ P/S ratio of 1.6x makes it a stock that is probably not worth investigating. However, there may be a reason for the high P/S, and further research is needed to determine if it is justified.

Check out our latest analysis for Ruihe Data Technology Holdings

How has Ruihe Data Technology Holdings performed recently?

For example, Ruihe Data Technology Holdings’s recent decline in earnings is thought-provoking. One possibility is that the P/S is high because investors believe the company will outperform the broader industry in the near future. If this is not the case, existing shareholders may be quite worried about the viability of the share price.

Want a complete picture of a company’s earnings, revenue, and cash flow? free A report on Ruihe Data Technology Holdings will help shed light on the company’s past performance.

What is the revenue growth trend for Ruihe Data Technology Holdings?

Ruihe Data Technology Holdings’s P/S ratio is typical for a company that is expected to experience robust growth and, more importantly, outperform its industry.

Looking at last year’s financials, we were disappointed to see that the company’s revenues were down 2.4%. This dragged down its performance over the last three years, but it still managed to achieve an 11% revenue increase overall. So, let’s start by acknowledging that despite some hiccups along the way, the company has done a good job of growing its revenues overall over this period.

Compared to the industry, which is expected to grow at 14% over the next 12 months, the company’s momentum is weak based on recent mid-year annual earnings results.

This information raises concerns that Ruihe Data Technology Holdings is trading at a higher P/S than the industry. It appears that many of the company’s investors are much more bullish than recent developments would suggest and are not willing to exit the stock at any price. Only the boldest would consider these prices sustainable, as a continuation of recent earnings trends will likely weigh on the share price eventually.

The last word

The P/S ratio of Ruiwa Data Technology Holdings has remained high even after the share price plunged. While it is not wise to use the price-to-sales ratio alone to decide whether to sell shares, it can be a practical indicator of the company’s future prospects.

After researching Ruihe Data Technology Holdings, we found that the company’s poor three-year earnings trend is worse than current industry expectations and therefore not hurting the P/S as much as we thought. At this point, we are not comfortable with the high P/S as this earnings performance is unlikely to support such positive sentiment for long. If the recent medium-term earnings trend continues, shareholders’ investments would be at significant risk and potential investors would be at risk of paying an excessive premium.

Before proceeding to the next step, 2 warning signs for Zuiwa Data Technology Holdings (No number 1 can be ignored!) Here’s what we discovered.

These are Risks make me reconsider my opinion of Ruihe Data Technology HoldingsTo see what other stocks are out there, check out our interactive list of high quality stocks.

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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. 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 of the stocks mentioned.

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