Rongxin Education and Culture Industry Development Co., Ltd.'s (SZSE:301231) Shares Climb 27% But Its Business Is Yet to Catch Up

Rongxin Education and Culture Industry Development Co., Ltd. (SZSE:301231) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.7% over the last year.

After such a large jump in price, given around half the companies in China's Media industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Rongxin Education and Culture Industry Development as a stock to avoid entirely with its 7.5x 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.

See our latest analysis for Rongxin Education and Culture Industry Development

What Does Rongxin Education and Culture Industry Development's Recent Performance Look Like?

For example, consider that Rongxin Education and Culture Industry Development's financial performance has been poor lately as its revenue has been in decline. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Rongxin Education and Culture Industry Development will help you shine a light on its historical performance.

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

Rongxin Education and Culture Industry Development'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.

Retrospectively, the last year delivered a frustrating 5.9% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 30% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10% shows it's an unpleasant look.

With this information, we find it concerning that Rongxin Education and Culture Industry Development 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 Rongxin Education and Culture Industry Development's P/S Mean For Investors?

The strong share price surge has lead to Rongxin Education and Culture Industry Development's P/S soaring as well. 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.

Our examination of Rongxin Education and Culture Industry Development revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. 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 Rongxin Education and Culture Industry Development that we have uncovered.

If you're unsure about the strength of Rongxin Education and Culture Industry Development's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.