To the annoyance of some shareholders, Shanghai Film Co., Ltd. (SHSE:601595) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

Even after such a large drop in price, given around half the companies in China's Entertainment industry have price-to-sales ratios (or "P/S") below 6x, you may still consider Shanghai Film as a stock to avoid entirely with its 11x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Shanghai Film Has Been Performing

With revenue growth that's superior to most other companies of late, Shanghai Film has been doing relatively well. 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.

How Is Shanghai Film's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shanghai Film's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 84%. The strong recent performance means it was also able to grow revenue by 70% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 40% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 26%, which is noticeably less attractive.

With this information, we can see why Shanghai Film is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Shanghai Film's P/S Mean For Investors?

A significant share price dive has done very little to deflate Shanghai Film's very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Shanghai Film shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Film, and understanding should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com