What Sichuan Newsnet Media (Group) Co.,Ltd.'s (SZSE:300987) 42% Share Price Gain Is Not Telling You

Sichuan Newsnet Media (Group) Co.,Ltd. (SZSE:300987) shareholders are no doubt pleased to see that the share price has bounced 42% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Sichuan Newsnet Media (Group)Ltd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11.5x, considering almost half the companies in China's Media industry have P/S ratios below 2.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Sichuan Newsnet Media (Group)Ltd

How Has Sichuan Newsnet Media (Group)Ltd Performed Recently?

Sichuan Newsnet Media (Group)Ltd has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sichuan Newsnet Media (Group)Ltd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Sichuan Newsnet Media (Group)Ltd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Newsnet Media (Group)Ltd's to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. Revenue has also lifted 15% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 20% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Sichuan Newsnet Media (Group)Ltd'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 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.

The Final Word

Sichuan Newsnet Media (Group)Ltd'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.

The fact that Sichuan Newsnet Media (Group)Ltd 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You need to take note of risks, for example - Sichuan Newsnet Media (Group)Ltd has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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.