Despite an already strong run, Ourpalm Co., Ltd. (SZSE:300315) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 106% in the last year.

Following the firm bounce in price, Ourpalm may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 18.7x, when you consider almost half of the companies in the Entertainment industry in China have P/S ratios under 9.2x and even P/S lower than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Ourpalm

What Does Ourpalm's P/S Mean For Shareholders?

Ourpalm could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. 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?

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 22% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 45% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 4.4% during the coming year according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 35%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Ourpalm's P/S is outpacing its industry peers. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Ourpalm have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've concluded that Ourpalm currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Ourpalm that you should be aware of.

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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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.