When you see that almost half of the companies in the Hospitality industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.7x, Tongcheng Travel Holdings Limited (HKG:780) looks to be giving off some sell signals with its 2.4x 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.

How Tongcheng Travel Holdings Has Been Performing

With revenue growth that's superior to most other companies of late, Tongcheng Travel Holdings has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Tongcheng Travel Holdings?

In order to justify its P/S ratio, Tongcheng Travel Holdings would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 77%. The strong recent performance means it was also able to grow revenue by 101% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 24% per annum over the next three years. That's shaping up to be materially higher than the 15% per year growth forecast for the broader industry.

With this information, we can see why Tongcheng Travel Holdings is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

Our look into Tongcheng Travel Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Tongcheng Travel Holdings you should be aware of.

If you're unsure about the strength of Tongcheng Travel 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com