Market Participants Recognise Huayi Brothers Media Corporation's (SZSE:300027) Revenues Pushing Shares 26% Higher

Despite an already strong run, Huayi Brothers Media Corporation (SZSE:300027) shares have been powering on, with a gain of 26% in the last thirty days. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in China's Entertainment industry have price-to-sales ratios (or "P/S") below 6.9x, you may consider Huayi Brothers Media as a stock to avoid entirely with its 15.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Huayi Brothers Media

How Has Huayi Brothers Media Performed Recently?

Recent times have been advantageous for Huayi Brothers Media as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Huayi Brothers Media will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Huayi Brothers Media's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 52% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 130% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 34%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Huayi Brothers Media's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Huayi Brothers Media's P/S Mean For Investors?

Shares in Huayi Brothers Media have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Huayi Brothers Media maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Entertainment industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Huayi Brothers Media that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.