Zhang Jia Jie Tourism Group Co., Ltd (SZSE:000430) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

Following the firm bounce in price, Zhang Jia Jie Tourism Group's price-to-sales (or "P/S") ratio of 7.2x might make it look like a sell right now compared to the wider Hospitality industry in China, where around half of the companies have P/S ratios below 5.9x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Zhang Jia Jie Tourism Group Has Been Performing

Recent times have been advantageous for Zhang Jia Jie Tourism Group as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Zhang Jia Jie Tourism Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Zhang Jia Jie Tourism Group's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 156% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 71% 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 slump, contracting by 78% during the coming year according to the one analyst following the company. Meanwhile, the broader industry is forecast to expand by 35%, which paints a poor picture.

In light of this, it's alarming that Zhang Jia Jie Tourism Group's P/S sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Key Takeaway

The large bounce in Zhang Jia Jie Tourism Group's shares has lifted the company's P/S handsomely. 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.

We've established that Zhang Jia Jie Tourism Group currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

Having said that, be aware Zhang Jia Jie Tourism Group is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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