What Emei Shan Tourism Co.,Ltd's (SZSE:000888) 37% Share Price Gain Is Not Telling You

Emei Shan Tourism Co.,Ltd (SZSE:000888) shareholders have had their patience rewarded with a 37% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 59%.

Since its price has surged higher, Emei Shan TourismLtd's price-to-sales (or "P/S") ratio of 7x 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 5.4x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Emei Shan TourismLtd

How Emei Shan TourismLtd Has Been Performing

With revenue growth that's superior to most other companies of late, Emei Shan TourismLtd has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Emei Shan TourismLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Emei Shan TourismLtd?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Emei Shan TourismLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 142% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 124% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 7.9% per annum over the next three years. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader industry.

In light of this, it's alarming that Emei Shan TourismLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Emei Shan TourismLtd's P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've concluded that Emei Shan TourismLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you take the next step, you should know about the 2 warning signs for Emei Shan TourismLtd that we have uncovered.

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.