Optimistic Investors Push Zhejiang Jinke Tom Culture Industry Co., LTD. (SZSE:300459) Shares Up 27% But Growth Is Lacking

Despite an already strong run, Zhejiang Jinke Tom Culture Industry Co., LTD. (SZSE:300459) shares have been powering on, with a gain of 27% in the last thirty days. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given around half the companies in China's Entertainment industry have price-to-sales ratios (or "P/S") below 6.8x, you may consider Zhejiang Jinke Tom Culture Industry as a stock to avoid entirely with its 19.3x 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 Zhejiang Jinke Tom Culture Industry

What Does Zhejiang Jinke Tom Culture Industry's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Zhejiang Jinke Tom Culture Industry over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Zhejiang Jinke Tom Culture Industry's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Zhejiang Jinke Tom Culture Industry'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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. This means it has also seen a slide in revenue over the longer-term as revenue is down 40% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 32% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Zhejiang Jinke Tom Culture Industry'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 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.

The Bottom Line On Zhejiang Jinke Tom Culture Industry's P/S

Zhejiang Jinke Tom Culture Industry's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Zhejiang Jinke Tom Culture Industry currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 1 warning sign for Zhejiang Jinke Tom Culture Industry that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.