Subdued Growth No Barrier To Ruicheng (China) Media Group Limited (HKG:1640) With Shares Advancing 27%

Despite an already strong run, Ruicheng (China) Media Group Limited (HKG:1640) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days were the cherry on top of the stock's 647% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, given around half the companies in Hong Kong's Media industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Ruicheng (China) Media Group as a stock to avoid entirely with its 7.8x 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 Ruicheng (China) Media Group

What Does Ruicheng (China) Media Group's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Ruicheng (China) Media Group over the last year, which is not ideal at all. 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. 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 Ruicheng (China) Media Group's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Ruicheng (China) Media Group would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 44%. The last three years don't look nice either as the company has shrunk revenue by 52% in aggregate. 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 9.2% shows it's an unpleasant look.

With this information, we find it concerning that Ruicheng (China) Media 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.

What We Can Learn From Ruicheng (China) Media Group's P/S?

The strong share price surge has lead to Ruicheng (China) Media Group'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 Ruicheng (China) Media Group 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. 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 2 warning signs for Ruicheng (China) Media Group (1 is significant!) that you need to be mindful of.

If you're unsure about the strength of Ruicheng (China) Media Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.