Rongxin Education and Culture Industry Development Co., Ltd. (SZSE:301231) shares have had a really impressive month, gaining 45% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Rongxin Education and Culture Industry Development is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.1x, considering almost half the companies in China's Media industry have P/S ratios below 2.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Rongxin Education and Culture Industry Development Has Been Performing

As an illustration, revenue has deteriorated at Rongxin Education and Culture Industry Development over the last year, which is not ideal at all. 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.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Rongxin Education and Culture Industry Development's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. As a result, revenue from three years ago have also fallen 30% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Rongxin Education and Culture Industry Development's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Rongxin Education and Culture Industry Development's P/S Mean For Investors?

The strong share price surge has lead to Rongxin Education and Culture Industry Development's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Rongxin Education and Culture Industry Development revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 2 warning signs we've spotted with Rongxin Education and Culture Industry Development (including 1 which is concerning).

If you're unsure about the strength of Rongxin Education and Culture Industry Development's 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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