What Tibet Urban Development and Investment Co.,LTD's (SHSE:600773) 25% Share Price Gain Is Not Telling You

Tibet Urban Development and Investment Co.,LTD (SHSE:600773) shareholders have had their patience rewarded with a 25% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Since its price has surged higher, given around half the companies in China's Real Estate industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Tibet Urban Development and InvestmentLTD as a stock to avoid entirely with its 11.4x 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 Tibet Urban Development and InvestmentLTD

How Tibet Urban Development and InvestmentLTD Has Been Performing

For example, consider that Tibet Urban Development and InvestmentLTD's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Tibet Urban Development and InvestmentLTD's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Tibet Urban Development and InvestmentLTD would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's top line. As a result, revenue from three years ago have also fallen 51% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Tibet Urban Development and InvestmentLTD's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Bottom Line On Tibet Urban Development and InvestmentLTD's P/S

The strong share price surge has lead to Tibet Urban Development and InvestmentLTD's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Tibet Urban Development and InvestmentLTD currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

Having said that, be aware Tibet Urban Development and InvestmentLTD is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.