Revenues Not Telling The Story For Zhonglu.Co.,Ltd (SHSE:600818) After Shares Rise 26%

Zhonglu.Co.,Ltd (SHSE:600818) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 7.3% isn't as impressive.

Since its price has surged higher, given around half the companies in China's Leisure industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Zhonglu.Co.Ltd as a stock to avoid entirely with its 4.5x 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 Zhonglu.Co.Ltd

What Does Zhonglu.Co.Ltd's P/S Mean For Shareholders?

The recent revenue growth at Zhonglu.Co.Ltd would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Zhonglu.Co.Ltd, 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?

In order to justify its P/S ratio, Zhonglu.Co.Ltd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 3.8% gain to the company's revenues. The latest three year period has also seen an excellent 37% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 21% shows it's noticeably less attractive.

With this information, we find it concerning that Zhonglu.Co.Ltd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Zhonglu.Co.Ltd's P/S

The strong share price surge has lead to Zhonglu.Co.Ltd's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Zhonglu.Co.Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Zhonglu.Co.Ltd that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.