Tangel Culture Co., Ltd.'s (SZSE:300148) 27% Share Price Surge Not Quite Adding Up

Tangel Culture Co., Ltd. (SZSE:300148) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Tangel Culture is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.4x, considering almost half the companies in China's Media industry have P/S ratios below 3.6x. 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.

Check out our latest analysis for Tangel Culture

How Tangel Culture Has Been Performing

For example, consider that Tangel Culture's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Tangel Culture, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Tangel Culture's Revenue Growth Trending?

In order to justify its P/S ratio, Tangel Culture would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 9.7% decrease to the company's top line. As a result, revenue from three years ago have also fallen 31% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 11% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Tangel Culture's P/S sits above the majority of other companies. 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 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.

What We Can Learn From Tangel Culture's P/S?

Tangel Culture's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Tangel Culture currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. 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.

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

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.