Vanfund Urban Investment and Development Co., Ltd. (SZSE:000638) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

Since its price has surged higher, Vanfund Urban Investment and Development's price-to-sales (or "P/S") ratio of 10.3x might make it look like a sell right now compared to the wider Healthcare Services industry in China, where around half of the companies have P/S ratios below 8x and even P/S below 4x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Vanfund Urban Investment and Development's P/S Mean For Shareholders?

For example, consider that Vanfund Urban Investment and Development's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Vanfund Urban Investment and Development's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 44%. 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. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 38% 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. 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.

What Does Vanfund Urban Investment and Development's P/S Mean For Investors?

The large bounce in Vanfund Urban Investment and Development's shares has lifted the company's P/S handsomely. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Vanfund Urban Investment and Development that you should be aware of.

If these risks are making you reconsider your opinion on Vanfund Urban Investment and Development, explore our interactive list of high quality stocks to get an idea of what else is out there.

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