Despite an already strong run, Zhejiang Jinke Tom Culture Industry Co., LTD. (SZSE:300459) shares have been powering on, with a gain of 45% in the last thirty days. The last 30 days bring the annual gain to a very sharp 28%.

Following the firm bounce in price, you could be forgiven for thinking Zhejiang Jinke Tom Culture Industry is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 21.1x, considering almost half the companies in China's Entertainment industry have P/S ratios below 6.9x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Zhejiang Jinke Tom Culture Industry's P/S Mean For Shareholders?

For instance, Zhejiang Jinke Tom Culture Industry's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Zhejiang Jinke Tom Culture Industry would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. The last three years don't look nice either as the company has shrunk revenue by 40% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 34% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Zhejiang Jinke Tom Culture Industry is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Zhejiang Jinke Tom Culture Industry's P/S

The strong share price surge has lead to Zhejiang Jinke Tom Culture Industry's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Zhejiang Jinke Tom Culture Industry currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Zhejiang Jinke Tom Culture Industry that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.