You may think that with a price-to-sales (or "P/S") ratio of 16x Songcheng Performance Development Co.,Ltd (SZSE:300144) is a stock to avoid completely, seeing as almost half of all the Hospitality companies in China have P/S ratios under 4.6x and even P/S lower than 2x aren't out of the ordinary. 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 Has Songcheng Performance DevelopmentLtd Performed Recently?

Songcheng Performance DevelopmentLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Songcheng Performance DevelopmentLtd?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Songcheng Performance DevelopmentLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 203%. The strong recent performance means it was also able to grow revenue by 65% 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.

Looking ahead now, revenue is anticipated to climb by 53% during the coming year according to the analysts following the company. That's shaping up to be materially higher than the 37% growth forecast for the broader industry.

With this information, we can see why Songcheng Performance DevelopmentLtd 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 Bottom Line On Songcheng Performance DevelopmentLtd's P/S

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.

As we suspected, our examination of Songcheng Performance DevelopmentLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Songcheng Performance DevelopmentLtd with six simple checks.

If you're unsure about the strength of Songcheng Performance DevelopmentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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