GUOMAI Culture & Media Co., Ltd.'s (SZSE:301052) Shares Climb 28% But Its Business Is Yet to Catch Up

Despite an already strong run, GUOMAI Culture & Media Co., Ltd. (SZSE:301052) shares have been powering on, with a gain of 28% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 5.0% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking GUOMAI Culture & Media is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.6x, considering almost half the companies in China's Media industry have P/S ratios below 3.4x. 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.

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View our latest analysis for GUOMAI Culture & Media

What Does GUOMAI Culture & Media's Recent Performance Look Like?

Revenue has risen firmly for GUOMAI Culture & Media recently, which is pleasing to see. 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.

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 GUOMAI Culture & Media's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered a decent 10.0% gain to the company's revenues. Revenue has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 10% shows it's noticeably less attractive.

With this information, we find it concerning that GUOMAI Culture & Media is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does GUOMAI Culture & Media's P/S Mean For Investors?

Shares in GUOMAI Culture & Media have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that GUOMAI Culture & Media 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. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with GUOMAI Culture & Media (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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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.