Improved Revenues Required Before China Quanjude(Group) Co.,Ltd. (SZSE:002186) Shares Find Their Feet

China Quanjude(Group) Co.,Ltd.'s (SZSE:002186) price-to-sales (or "P/S") ratio of 2.1x may look like a very appealing investment opportunity when you consider close to half the companies in the Hospitality industry in China have P/S ratios greater than 4.9x. 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 China Quanjude(Group)Ltd

What Does China Quanjude(Group)Ltd's P/S Mean For Shareholders?

China Quanjude(Group)Ltd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Quanjude(Group)Ltd will help you shine a light on its historical performance.

How Is China Quanjude(Group)Ltd's Revenue Growth Trending?

China Quanjude(Group)Ltd's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered an exceptional 37% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 53% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

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 can see why China Quanjude(Group)Ltd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

In line with expectations, China Quanjude(Group)Ltd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for China Quanjude(Group)Ltd with six simple checks.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.