There's Reason For Concern Over Nanjing Business & Tourism Corp.,Ltd.'s (SHSE:600250) Massive 25% Price Jump

Nanjing Business & Tourism Corp.,Ltd. (SHSE:600250) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 60% in the last year.

Since its price has surged higher, when almost half of the companies in China's Retail Distributors industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Nanjing Business & TourismLtd as a stock not worth researching with its 3.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Nanjing Business & TourismLtd

What Does Nanjing Business & TourismLtd's P/S Mean For Shareholders?

Nanjing Business & TourismLtd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be 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 Nanjing Business & TourismLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Nanjing Business & TourismLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Nanjing Business & TourismLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Still, lamentably revenue has fallen 6.2% in aggregate from three years ago, which is disappointing. 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 28% shows it's an unpleasant look.

With this information, we find it concerning that Nanjing Business & TourismLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What Does Nanjing Business & TourismLtd's P/S Mean For Investors?

Shares in Nanjing Business & TourismLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Nanjing Business & TourismLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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 settle on your opinion, we've discovered 2 warning signs for Nanjing Business & TourismLtd (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of Nanjing Business & TourismLtd'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.