There's Reason For Concern Over Zhang Jia Jie Tourism Group Co., Ltd's (SZSE:000430) Massive 28% Price Jump

Zhang Jia Jie Tourism Group Co., Ltd (SZSE:000430) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.4% over the last year.

Since its price has surged higher, Zhang Jia Jie Tourism Group's price-to-sales (or "P/S") ratio of 6.8x might make it look like a sell right now compared to the wider Hospitality industry in China, where around half of the companies have P/S ratios below 4.8x and even P/S below 1.9x are quite common. 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

How Zhang Jia Jie Tourism Group Has Been Performing

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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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.

Is There Enough Revenue Growth Forecasted For Zhang Jia Jie Tourism Group?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Zhang Jia Jie Tourism Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 46% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 66% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Zhang Jia Jie Tourism Group is trading at a P/S higher than the industry. 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 Zhang Jia Jie Tourism Group's P/S

Zhang Jia Jie Tourism Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhang Jia Jie Tourism Group 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Zhang Jia Jie Tourism Group that you should be aware 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.