Vanfund Urban Investment and Development Co., Ltd. (SZSE:000638) shares have continued their recent momentum with a 28% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Vanfund Urban Investment and Development is a stock not worth researching with a price-to-sales ratios (or "P/S") of 10.1x, considering almost half the companies in China's Healthcare Services industry have P/S ratios below 8.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Vanfund Urban Investment and Development's Recent Performance Look Like?

The revenue growth achieved at Vanfund Urban Investment and Development over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Vanfund Urban Investment and Development would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 11% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 143% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Vanfund Urban Investment and Development is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Vanfund Urban Investment and Development's P/S is on the rise since its shares have risen strongly. 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.

We've established that Vanfund Urban Investment and Development currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 1 warning sign for Vanfund Urban Investment and Development that we have uncovered.

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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