Despite an already strong run, Longhui International Holdings Limited (HKG:1007) shares have been powering on, with a gain of 39% in the last thirty days. The annual gain comes to 106% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies operating in Hong Kong's Hospitality industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Longhui International Holdings as a stock to potentially avoid with its 2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Longhui International Holdings' Recent Performance Look Like?

Revenue has risen firmly for Longhui International Holdings recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Longhui International Holdings' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. Still, lamentably revenue has fallen 55% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 19% shows it's an unpleasant look.

In light of this, it's alarming that Longhui International Holdings' P/S sits above the majority of other companies. 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.

What Does Longhui International Holdings' P/S Mean For Investors?

The large bounce in Longhui International Holdings' shares has lifted the company's P/S handsomely. 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 established that Longhui International Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Longhui International Holdings (2 make us uncomfortable!) that you should be aware of before investing here.

If you're unsure about the strength of Longhui International 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.