Despite an already strong run, Chengdu B-ray Media Co.,Ltd. (SHSE:600880) shares have been powering on, with a gain of 26% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Chengdu B-ray MediaLtd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 13.2x, when you consider almost half of the companies in the Media industry in China have P/S ratios under 4x and even P/S lower than 1.8x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Chengdu B-ray MediaLtd's P/S Mean For Shareholders?

Chengdu B-ray MediaLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely 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, Chengdu B-ray MediaLtd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 30% as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 13% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Chengdu B-ray MediaLtd'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.

The Bottom Line On Chengdu B-ray MediaLtd's P/S

Shares in Chengdu B-ray MediaLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

As we suspected, our examination of Chengdu B-ray MediaLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Chengdu B-ray MediaLtd is showing 1 warning sign in our investment analysis, you should know about.

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.