LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) Stock Rockets 81% As Investors Are Less Pessimistic Than Expected

LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) shares have continued their recent momentum with a 81% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 82% in the last year.

Following the firm bounce in price, you could be forgiven for thinking LingNan Eco&Culture-TourismLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8x, considering almost half the companies in China's Construction industry have P/S ratios below 1.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for LingNan Eco&Culture-TourismLtd

How LingNan Eco&Culture-TourismLtd Has Been Performing

For instance, LingNan Eco&Culture-TourismLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on LingNan Eco&Culture-TourismLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For LingNan Eco&Culture-TourismLtd?

LingNan Eco&Culture-TourismLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 48% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 76% 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.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this in mind, we find it worrying that LingNan Eco&Culture-TourismLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does LingNan Eco&Culture-TourismLtd's P/S Mean For Investors?

Shares in LingNan Eco&Culture-TourismLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of LingNan Eco&Culture-TourismLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 4 warning signs for LingNan Eco&Culture-TourismLtd (3 make us uncomfortable!) that we have uncovered.

If these risks are making you reconsider your opinion on LingNan Eco&Culture-TourismLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.