Beijing Jingxi Culture & Tourism Co.,Ltd's (SZSE:000802) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Beijing Jingxi Culture & Tourism Co.,Ltd (SZSE:000802) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 10% is also fairly reasonable.

Since its price has surged higher, you could be forgiven for thinking Beijing Jingxi Culture & TourismLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 9x, considering almost half the companies in China's Entertainment industry have P/S ratios below 7.2x. 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 Beijing Jingxi Culture & TourismLtd

What Does Beijing Jingxi Culture & TourismLtd's P/S Mean For Shareholders?

Beijing Jingxi Culture & TourismLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. 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.

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 Beijing Jingxi Culture & TourismLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Beijing Jingxi Culture & TourismLtd?

The only time you'd be truly comfortable seeing a P/S as high as Beijing Jingxi Culture & TourismLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 143% gain to the company's top line. Still, revenue has fallen 3.7% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 33% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Beijing Jingxi Culture & TourismLtd 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. There's a very 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.

The Bottom Line On Beijing Jingxi Culture & TourismLtd's P/S

Beijing Jingxi Culture & TourismLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our examination of Beijing Jingxi Culture & TourismLtd 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Beijing Jingxi Culture & TourismLtd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.