Guangdong Guangzhou Daily Media Co., Ltd.'s (SZSE:002181) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Guangdong Guangzhou Daily Media Co., Ltd. (SZSE:002181) shares have been powering on, with a gain of 26% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.9% in the last twelve months.

Following the firm bounce in price, given around half the companies in China's Media industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Guangdong Guangzhou Daily Media as a stock to avoid entirely with its 9.9x P/S ratio. 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 Guangdong Guangzhou Daily Media

What Does Guangdong Guangzhou Daily Media's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Guangdong Guangzhou Daily Media, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Guangdong Guangzhou Daily Media?

Guangdong Guangzhou Daily Media'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.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.9% last year. The latest three year period has also seen a 12% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Guangdong Guangzhou Daily Media's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 recent growth rates.

The Final Word

The strong share price surge has lead to Guangdong Guangzhou Daily Media's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Guangdong Guangzhou Daily Media currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Guangdong Guangzhou Daily Media that you need to take into consideration.

If these risks are making you reconsider your opinion on Guangdong Guangzhou Daily Media, 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.