After Leaping 29% China Cultural Tourism and Agriculture Group Limited (HKG:542) Shares Are Not Flying Under The Radar

China Cultural Tourism and Agriculture Group Limited (HKG:542) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.2% over the last year.

Following the firm bounce in price, given around half the companies in Hong Kong's Hospitality industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider China Cultural Tourism and Agriculture Group as a stock to avoid entirely with its 5.5x 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.

Check out our latest analysis for China Cultural Tourism and Agriculture Group

How China Cultural Tourism and Agriculture Group Has Been Performing

For instance, China Cultural Tourism and Agriculture Group's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 China Cultural Tourism and Agriculture Group will help you shine a light on its historical performance.

How Is China Cultural Tourism and Agriculture Group's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like China Cultural Tourism and Agriculture Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 81% decrease to the company's top line. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 20% shows it's noticeably more attractive.

With this in consideration, it's not hard to understand why China Cultural Tourism and Agriculture Group's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From China Cultural Tourism and Agriculture Group's P/S?

China Cultural Tourism and Agriculture Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

As we suspected, our examination of China Cultural Tourism and Agriculture Group revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for China Cultural Tourism and Agriculture Group you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.