You may think that with a price-to-sales (or "P/S") ratio of 6x Emei Shan Tourism Co.,Ltd (SZSE:000888) is a stock to potentially avoid, seeing as almost half of all the Hospitality companies in China have P/S ratios under 4.5x and even P/S lower than 1.7x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Emei Shan TourismLtd's P/S Mean For Shareholders?

Recent revenue growth for Emei Shan TourismLtd has been in line with the industry. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Emei Shan TourismLtd?

In order to justify its P/S ratio, Emei Shan TourismLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 104% last year. The strong recent performance means it was also able to grow revenue by 99% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 7.1% over the next year. That's shaping up to be materially lower than the 28% growth forecast for the broader industry.

With this information, we find it concerning that Emei Shan TourismLtd 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 Final Word

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Emei Shan TourismLtd, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Emei Shan TourismLtd.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

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