Further Upside For Guangzhou Lingnan Group Holdings Company Limited (SZSE:000524) Shares Could Introduce Price Risks After 26% Bounce

Guangzhou Lingnan Group Holdings Company Limited (SZSE:000524) shareholders have had their patience rewarded with a 26% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, when around half the companies operating in China's Hospitality industry have price-to-sales ratios (or "P/S") above 5.4x, you may still consider Guangzhou Lingnan Group Holdings as an incredibly enticing stock to check out with its 2.1x P/S ratio. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Guangzhou Lingnan Group Holdings

How Has Guangzhou Lingnan Group Holdings Performed Recently?

Guangzhou Lingnan Group Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Guangzhou Lingnan Group Holdings.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Guangzhou Lingnan Group Holdings would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an exceptional 228% gain to the company's top line. Pleasingly, revenue has also lifted 81% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 32% each year as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 11% each year, which is noticeably less attractive.

With this in consideration, we find it intriguing that Guangzhou Lingnan Group Holdings' P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What Does Guangzhou Lingnan Group Holdings' P/S Mean For Investors?

Even after such a strong price move, Guangzhou Lingnan Group Holdings' P/S still trails the rest of the industry. 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.

To us, it seems Guangzhou Lingnan Group Holdings currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Guangzhou Lingnan Group Holdings with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Guangzhou Lingnan Group Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.