Despite an already strong run, Changbai Mountain Tourism Co., Ltd. (SHSE:603099) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 83% in the last year.

Following the firm bounce in price, when almost half of the companies in China's Hospitality industry have price-to-sales ratios (or "P/S") below 5.6x, you may consider Changbai Mountain Tourism as a stock not worth researching with its 10x 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 Changbai Mountain Tourism

What Does Changbai Mountain Tourism's P/S Mean For Shareholders?

Recent times have been advantageous for Changbai Mountain Tourism as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Changbai Mountain Tourism?

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

Taking a look back first, we see that the company grew revenue by an impressive 172% last year. Pleasingly, revenue has also lifted 195% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 24% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 39%, which is noticeably more attractive.

With this information, we find it concerning that Changbai Mountain Tourism is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Changbai Mountain Tourism's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Changbai Mountain Tourism currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 1 warning sign for Changbai Mountain Tourism that you need to take into consideration.

If these risks are making you reconsider your opinion on Changbai Mountain Tourism, 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.