Changbai Mountain Tourism Co., Ltd. (SHSE:603099) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The annual gain comes to 171% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Changbai Mountain Tourism may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 10.4x, since almost half of all companies in the Hospitality industry in China have P/S ratios under 5.7x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Changbai Mountain Tourism Has Been Performing

Recent times have been advantageous for Changbai Mountain Tourism as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Changbai Mountain Tourism?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Changbai Mountain Tourism's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 179% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% during the coming year according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 18%, which is noticeably more attractive.

With this information, we find it concerning that Changbai Mountain Tourism 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 Key Takeaway

Changbai Mountain Tourism's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've concluded that Changbai Mountain Tourism currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Changbai Mountain Tourism that we have uncovered.

If you're unsure about the strength of Changbai Mountain Tourism'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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