With a price-to-sales (or "P/S") ratio of 14.7x Huayi Brothers Media Corporation (SZSE:300027) may be sending very bearish signals at the moment, given that almost half of all the Entertainment companies in China have P/S ratios under 8.2x and even P/S lower than 4x are not unusual. 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 Huayi Brothers Media

How Huayi Brothers Media Has Been Performing

While the industry has experienced revenue growth lately, Huayi Brothers Media's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Huayi Brothers Media?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Huayi Brothers Media's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 37%. This means it has also seen a slide in revenue over the longer-term as revenue is down 70% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 188% during the coming year according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 35%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Huayi Brothers Media's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Huayi Brothers Media's P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Huayi Brothers Media shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Huayi Brothers Media with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Huayi Brothers Media, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.