LingNan Eco&Culture-Tourism Co.,Ltd.'s (SZSE:002717) 26% Price Boost Is Out Of Tune With Revenues

The LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 98%.

Since its price has surged higher, given around half the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider LingNan Eco&Culture-TourismLtd as a stock to avoid entirely with its 6.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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

What Does LingNan Eco&Culture-TourismLtd's Recent Performance Look Like?

For example, consider that LingNan Eco&Culture-TourismLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on LingNan Eco&Culture-TourismLtd will help you shine a light on its historical performance.

How Is LingNan Eco&Culture-TourismLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like LingNan Eco&Culture-TourismLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 48%. 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.

In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that LingNan Eco&Culture-TourismLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

The strong share price surge has lead to LingNan Eco&Culture-TourismLtd's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for LingNan Eco&Culture-TourismLtd that you should be aware of.

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.

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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.