Improved Revenues Required Before China Quanjude(Group) Co.,Ltd. (SZSE:002186) Stock's 28% Jump Looks Justified

China Quanjude(Group) Co.,Ltd. (SZSE:002186) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 5.5% isn't as attractive.

Even after such a large jump in price, given close to half the companies in China's Hospitality industry have price-to-sales ratios (or "P/S") above 5.7x, you may still consider China Quanjude(Group)Ltd as a highly attractive investment with its 2.8x 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.

View our latest analysis for China Quanjude(Group)Ltd

How Has China Quanjude(Group)Ltd Performed Recently?

China Quanjude(Group)Ltd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on China Quanjude(Group)Ltd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like China Quanjude(Group)Ltd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 15%. This was backed up an excellent period prior to see revenue up by 44% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 36% shows it's noticeably less attractive.

In light of this, it's understandable that China Quanjude(Group)Ltd's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

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

Shares in China Quanjude(Group)Ltd have risen appreciably however, its P/S is still subdued. 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.

As we suspected, our examination of China Quanjude(Group)Ltd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

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.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.