There's Reason For Concern Over Tibet Development Co., Ltd.'s (SZSE:000752) Massive 25% Price Jump

Tibet Development Co., Ltd. (SZSE:000752) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 9.3% isn't as attractive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Tibet Development's P/S ratio of 5.4x, since the median price-to-sales (or "P/S") ratio for the Beverage industry in China is also close to 5.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Tibet Development

How Has Tibet Development Performed Recently?

The revenue growth achieved at Tibet Development over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Tibet Development will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tibet Development's earnings, revenue and cash flow.

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

Tibet Development's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 10.0% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Tibet Development's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Tibet Development's P/S?

Tibet Development's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Tibet Development currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Tibet Development with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Tibet Development, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.