Despite an already strong run, Tianyu Digital Technology (Dalian) Group Co., Ltd. (SZSE:002354) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.

Although its price has surged higher, Tianyu Digital Technology (Dalian) Group may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 4.2x, since almost half of all companies in the Entertainment industry in China have P/S ratios greater than 7.1x and even P/S higher than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Tianyu Digital Technology (Dalian) Group Has Been Performing

Tianyu Digital Technology (Dalian) Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Is There Any Revenue Growth Forecasted For Tianyu Digital Technology (Dalian) Group?

The only time you'd be truly comfortable seeing a P/S as low as Tianyu Digital Technology (Dalian) Group's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 14% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 25% as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 32% growth forecast for the broader industry.

In light of this, it's understandable that Tianyu Digital Technology (Dalian) Group's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Tianyu Digital Technology (Dalian) Group's P/S close to the industry median. 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.

As we suspected, our examination of Tianyu Digital Technology (Dalian) Group's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Tianyu Digital Technology (Dalian) Group with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.