Despite an already strong run, China Tangshang Holdings Limited (HKG:674) shares have been powering on, with a gain of 38% in the last thirty days. The last month tops off a massive increase of 175% in the last year.

After such a large jump in price, when almost half of the companies in Hong Kong's Commercial Services industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider China Tangshang Holdings as a stock probably not worth researching with its 1.9x 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 as high as it is.

What Does China Tangshang Holdings' P/S Mean For Shareholders?

For instance, China Tangshang Holdings' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

China Tangshang Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 54%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

When compared to the industry's one-year growth forecast of 5.2%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we can see why China Tangshang Holdings is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Final Word

China Tangshang Holdings' P/S is on the rise since its shares have risen strongly. 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.

It's no surprise that China Tangshang Holdings can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

Before you settle on your opinion, we've discovered 2 warning signs for China Tangshang Holdings (1 is a bit unpleasant!) that you should be aware of.

If you're unsure about the strength of China Tangshang Holdings' 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.