There's Reason For Concern Over Zhang Jia Jie Tourism Group Co., Ltd's (SZSE:000430) Massive 30% Price Jump

Those holding Zhang Jia Jie Tourism Group Co., Ltd (SZSE:000430) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Following the firm bounce in price, Zhang Jia Jie Tourism Group may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 7x, since almost half of all companies in the Hospitality in China have P/S ratios under 5.4x and even P/S lower than 2x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zhang Jia Jie Tourism Group

What Does Zhang Jia Jie Tourism Group's Recent Performance Look Like?

Recent times have been quite advantageous for Zhang Jia Jie Tourism Group as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. 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 Zhang Jia Jie Tourism Group will help you shine a light on its historical performance.

How Is Zhang Jia Jie Tourism Group's Revenue Growth Trending?

In order to justify its P/S ratio, Zhang Jia Jie Tourism Group would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 156% last year. The latest three year period has also seen an excellent 71% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 39% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Zhang Jia Jie Tourism Group's P/S sits above the majority of other companies. 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.

What We Can Learn From Zhang Jia Jie Tourism Group's P/S?

The large bounce in Zhang Jia Jie Tourism Group's shares has lifted the company's P/S handsomely. 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.

The fact that Zhang Jia Jie Tourism Group currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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 Zhang Jia Jie Tourism Group that you need to be mindful of.

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.