Ourpalm Co., Ltd. (SZSE:300315) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

Following the firm bounce in price, you could be forgiven for thinking Ourpalm is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 19.4x, considering almost half the companies in China's Entertainment industry have P/S ratios below 6.9x. 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.

What Does Ourpalm's Recent Performance Look Like?

Ourpalm hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. 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, Ourpalm would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. As a result, revenue from three years ago have also fallen 42% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 14% over the next year. Meanwhile, the rest of the industry is forecast to expand by 34%, which is noticeably more attractive.

With this information, we find it concerning that Ourpalm 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Ourpalm's P/S?

Ourpalm'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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Ourpalm, this doesn't appear to be impacting the P/S in the slightest. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Ourpalm with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Ourpalm, explore our interactive list of high quality stocks to get an idea of what else is out there.

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