Unpleasant Surprises Could Be In Store For Hangzhou Wensli Silk Culture Co., Ltd.'s (SZSE:301066) Shares

When you see that almost half of the companies in the Luxury industry in China have price-to-sales ratios (or "P/S") below 1.6x, Hangzhou Wensli Silk Culture Co., Ltd. (SZSE:301066) looks to be giving off some sell signals with its 3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Hangzhou Wensli Silk Culture

What Does Hangzhou Wensli Silk Culture's P/S Mean For Shareholders?

Hangzhou Wensli Silk Culture has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 Hangzhou Wensli Silk Culture will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Hangzhou Wensli Silk Culture?

The only time you'd be truly comfortable seeing a P/S as high as Hangzhou Wensli Silk Culture's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 14% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Hangzhou Wensli Silk Culture'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 Bottom Line On Hangzhou Wensli Silk Culture's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Hangzhou Wensli Silk Culture currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Hangzhou Wensli Silk Culture (of which 1 shouldn't be ignored!) you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.