Investor Optimism Abounds Yunnan Tourism Co., Ltd. (SZSE:002059) But Growth Is Lacking

Yunnan Tourism Co., Ltd.'s (SZSE:002059) price-to-sales (or "P/S") ratio of 6.5x might make it look like a sell right now compared to the Hospitality industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 1.7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Yunnan Tourism

What Does Yunnan Tourism's Recent Performance Look Like?

Recent times have been quite advantageous for Yunnan Tourism 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Yunnan Tourism, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 65% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 62% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 26% shows it's an unpleasant look.

With this information, we find it concerning that Yunnan Tourism 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 Key Takeaway

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 Yunnan Tourism revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Yunnan Tourism, and understanding should be part of your investment process.

If you're unsure about the strength of Yunnan Tourism's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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