Despite an already strong run, Vanfund Urban Investment and Development Co., Ltd. (SZSE:000638) shares have been powering on, with a gain of 33% in the last thirty days. The last 30 days bring the annual gain to a very sharp 34%.

Since its price has surged higher, you could be forgiven for thinking Vanfund Urban Investment and Development is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 18.9x, considering almost half the companies in China's Healthcare Services industry have P/S ratios below 8.2x. 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.

Check out our latest analysis for Vanfund Urban Investment and Development

What Does Vanfund Urban Investment and Development's Recent Performance Look Like?

For example, consider that Vanfund Urban Investment and Development's financial performance has been poor lately as its revenue has been in decline. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Vanfund Urban Investment and Development would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 68% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

This is in contrast to the rest of the industry, which is expected to grow by 39% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Vanfund Urban Investment and Development's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

The Final Word

Shares in Vanfund Urban Investment and Development have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

The fact that Vanfund Urban Investment and Development 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. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 1 warning sign for Vanfund Urban Investment and Development that we have uncovered.

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.