Optimistic Investors Push Shanghai Jinfeng Wine Company Limited (SHSE:600616) Shares Up 31% But Growth Is Lacking

Shanghai Jinfeng Wine Company Limited (SHSE:600616) shares have continued their recent momentum with a 31% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

Since its price has surged higher, you could be forgiven for thinking Shanghai Jinfeng Wine is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.6x, considering almost half the companies in China's Beverage industry have P/S ratios below 5.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Shanghai Jinfeng Wine

How Shanghai Jinfeng Wine Has Been Performing

For instance, Shanghai Jinfeng Wine's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Jinfeng Wine will help you shine a light on its historical performance.

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

Shanghai Jinfeng Wine's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.4%. As a result, revenue from three years ago have also fallen 7.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this information, we find it concerning that Shanghai Jinfeng Wine is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Shanghai Jinfeng Wine's P/S?

Shares in Shanghai Jinfeng Wine have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Shanghai Jinfeng Wine 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It is also worth noting that we have found 1 warning sign for Shanghai Jinfeng Wine that you need to take into consideration.

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.