What Dalian Friendship (Group) Co., Ltd.'s (SZSE:000679) 31% Share Price Gain Is Not Telling You

Dalian Friendship (Group) Co., Ltd. (SZSE:000679) shares have continued their recent momentum with a 31% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Dalian Friendship (Group) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.1x, considering almost half the companies in China's Multiline Retail industry have P/S ratios below 1.5x. 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 Dalian Friendship (Group)

What Does Dalian Friendship (Group)'s Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Dalian Friendship (Group), which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Dalian Friendship (Group)'s earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Dalian Friendship (Group)'s is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 4.2% gain to the company's revenues. Still, lamentably revenue has fallen 19% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

With this information, we find it concerning that Dalian Friendship (Group) 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.

The Bottom Line On Dalian Friendship (Group)'s P/S

Shares in Dalian Friendship (Group) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Dalian Friendship (Group) currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Dalian Friendship (Group) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.