There's Reason For Concern Over China Brilliant Global Limited's (HKG:8026) Massive 36% Price Jump

China Brilliant Global Limited (HKG:8026) shares have continued their recent momentum with a 36% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 40%.

After such a large jump in price, when almost half of the companies in Hong Kong's Retail Distributors industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider China Brilliant Global as a stock not worth researching with its 6.2x 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.

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Check out our latest analysis for China Brilliant Global

How Has China Brilliant Global Performed Recently?

The revenue growth achieved at China Brilliant Global over the last year would be more than acceptable for most companies. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for China Brilliant Global, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is China Brilliant Global's Revenue Growth Trending?

China Brilliant Global's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 38% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that China Brilliant Global's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From China Brilliant Global's P/S?

The strong share price surge has lead to China Brilliant Global'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.

The fact that China Brilliant Global currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely 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.

You need to take note of risks, for example - China Brilliant Global has 2 warning signs (and 1 which is a bit unpleasant) we think 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.