Rongxin Education and Culture Industry Development Co., Ltd. (SZSE:301231) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

Although its price has dipped substantially, when almost half of the companies in China's Media industry have price-to-sales ratios (or "P/S") below 2.3x, you may still consider Rongxin Education and Culture Industry Development as a stock not worth researching with its 4.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Rongxin Education and Culture Industry Development Performed Recently?

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Rongxin Education and Culture Industry Development would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.

With this information, we find it concerning that Rongxin Education and Culture Industry Development is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate 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.

The Key Takeaway

Rongxin Education and Culture Industry Development's shares may have suffered, but its P/S remains high. 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.

Our examination of Rongxin Education and Culture Industry Development revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Rongxin Education and Culture Industry Development (3 are a bit concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Rongxin Education and Culture Industry Development's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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