Guangzhou Jinyi Media Corporation's (SZSE:002905) Share Price Boosted 31% But Its Business Prospects Need A Lift Too

Guangzhou Jinyi Media Corporation (SZSE:002905) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

Although its price has surged higher, Guangzhou Jinyi Media's price-to-sales (or "P/S") ratio of 3.8x might still make it look like a buy right now compared to the Entertainment industry in China, where around half of the companies have P/S ratios above 7.6x and even P/S above 16x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Guangzhou Jinyi Media

What Does Guangzhou Jinyi Media's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Guangzhou Jinyi Media over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Guangzhou Jinyi Media 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 Guangzhou Jinyi Media's earnings, revenue and cash flow.

How Is Guangzhou Jinyi Media's Revenue Growth Trending?

In order to justify its P/S ratio, Guangzhou Jinyi Media would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 16%. This means it has also seen a slide in revenue over the longer-term as revenue is down 22% in total over the last three years. 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 23% shows it's an unpleasant look.

With this information, we are not surprised that Guangzhou Jinyi Media is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Guangzhou Jinyi Media's P/S?

Guangzhou Jinyi Media's stock price has surged recently, but its but its P/S still remains modest. 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 Guangzhou Jinyi Media revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Before you take the next step, you should know about the 1 warning sign for Guangzhou Jinyi Media that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.