There's Reason For Concern Over Zhejiang Talent Television and Film Co., Ltd.'s (SZSE:300426) Massive 40% Price Jump

The Zhejiang Talent Television and Film Co., Ltd. (SZSE:300426) share price has done very well over the last month, posting an excellent gain of 40%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.4% over the last year.

Following the firm bounce in price, given around half the companies in China's Entertainment industry have price-to-sales ratios (or "P/S") below 5.6x, you may consider Zhejiang Talent Television and Film as a stock to avoid entirely with its 12.5x 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 Zhejiang Talent Television and Film

What Does Zhejiang Talent Television and Film's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Zhejiang Talent Television and Film over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Talent Television and Film will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Zhejiang Talent Television and Film?

The only time you'd be truly comfortable seeing a P/S as steep as Zhejiang Talent Television and Film's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 22%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 55% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Zhejiang Talent Television and Film's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What Does Zhejiang Talent Television and Film's P/S Mean For Investors?

Shares in Zhejiang Talent Television and Film have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Zhejiang Talent Television and Film 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Zhejiang Talent Television and Film that you need to be mindful of.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.