What Changbai Mountain Tourism Co., Ltd.'s (SHSE:603099) P/S Is Not Telling You

You may think that with a price-to-sales (or "P/S") ratio of 8.5x Changbai Mountain Tourism Co., Ltd. (SHSE:603099) is a stock to avoid completely, seeing as almost half of all the Hospitality companies in China have P/S ratios under 5x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Changbai Mountain Tourism

How Has Changbai Mountain Tourism Performed Recently?

Changbai Mountain Tourism certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Changbai Mountain Tourism will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Changbai Mountain Tourism?

The only time you'd be truly comfortable seeing a P/S as steep as Changbai Mountain Tourism's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 179%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% during the coming year according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 27%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Changbai Mountain Tourism's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Changbai Mountain Tourism's P/S Mean For Investors?

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.

We've concluded that Changbai Mountain Tourism currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Changbai Mountain Tourism, and understanding should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.