Despite an already strong run, Ruicheng (China) Media Group Limited (HKG:1640) shares have been powering on, with a gain of 109% in the last thirty days. The annual gain comes to 288% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Media industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Ruicheng (China) Media Group as a stock probably not worth researching with its 2.2x 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.

How Ruicheng (China) Media Group Has Been Performing

For instance, Ruicheng (China) Media Group's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Ruicheng (China) Media Group's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Ruicheng (China) Media Group's to be considered reasonable.

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 8.2%. The last three years don't look nice either as the company has shrunk revenue by 15% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 4.9% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Ruicheng (China) Media Group's P/S exceeds that of its industry peers. 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

Ruicheng (China) Media Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Ruicheng (China) Media Group 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.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Ruicheng (China) Media Group (of which 3 make us uncomfortable!) you should know about.

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.