Despite an already strong run, Shanghai Jinfeng Wine Company Limited (SHSE:600616) shares have been powering on, with a gain of 31% in the last thirty days. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, you could be forgiven for thinking Shanghai Jinfeng Wine is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.6x, considering almost half the companies in China's Beverage industry have P/S ratios below 5.4x. 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 Jinfeng Wine Has Been Performing

For instance, Shanghai Jinfeng Wine's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Shanghai Jinfeng Wine's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.4%. As a result, revenue from three years ago have also fallen 7.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 13% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Shanghai Jinfeng Wine is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shanghai Jinfeng Wine's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai Jinfeng Wine revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Shanghai Jinfeng Wine has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Shanghai Jinfeng Wine'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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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.