Despite an already strong run, Litian Pictures Holdings Limited (HKG:9958) shares have been powering on, with a gain of 49% in the last thirty days. The annual gain comes to 140% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in Hong Kong's Entertainment industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Litian Pictures Holdings as a stock to avoid entirely with its 7.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Litian Pictures Holdings Has Been Performing

For instance, Litian Pictures Holdings' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Litian Pictures Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's top line. As a result, revenue from three years ago have also fallen 82% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 45% shows it's an unpleasant look.

With this in mind, we find it worrying that Litian Pictures Holdings' P/S exceeds that of its industry peers. 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 Litian Pictures Holdings' P/S Mean For Investors?

Litian Pictures Holdings' P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Litian Pictures Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. 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.

You should always think about risks. Case in point, we've spotted 4 warning signs for Litian Pictures Holdings you should be aware of, and 1 of them can't be ignored.

If you're unsure about the strength of Litian Pictures 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.