LingNan Eco&Culture-Tourism Co.,Ltd.'s (SZSE:002717) 30% Share Price Surge Not Quite Adding Up

LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) shares have continued their recent momentum with a 30% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 10.0% isn't as attractive.

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 4.3x, considering almost half the companies in China's Construction industry have P/S ratios below 1.3x. 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 example, consider that LingNan Eco&Culture-TourismLtd's financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for LingNan Eco&Culture-TourismLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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.

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 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 15% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

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. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that LingNan Eco&Culture-TourismLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware LingNan Eco&Culture-TourismLtd is showing 3 warning signs in our investment analysis, you should know about.

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.