The Market Lifts Guangzhou Lingnan Group Holdings Company Limited (SZSE:000524) Shares 26% But It Can Do More

Guangzhou Lingnan Group Holdings Company Limited (SZSE:000524) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.

In spite of the firm bounce 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. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Guangzhou Lingnan Group Holdings

How Guangzhou Lingnan Group Holdings Has Been Performing

With revenue growth that's superior to most other companies of late, Guangzhou Lingnan Group Holdings has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Guangzhou Lingnan Group Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

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.

If we review the last year of revenue growth, the company posted a terrific increase of 124%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 17% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 82% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 39%, which is noticeably less attractive.

With this information, we find it odd that Guangzhou Lingnan Group Holdings is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Guangzhou Lingnan Group Holdings' P/S?

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

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. Take a look at our free balance sheet analysis for Guangzhou Lingnan Group Holdings with six simple checks on some of these key factors.

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.