The Zhonglu.Co.,Ltd (SHSE:600818) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 18% in that time.

Although its price has dipped substantially, when almost half of the companies in China's Leisure industry have price-to-sales ratios (or "P/S") below 3x, you may still consider Zhonglu.Co.Ltd as a stock not worth researching with its 6.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Zhonglu.Co.Ltd Has Been Performing

It looks like revenue growth has deserted Zhonglu.Co.Ltd recently, which is not something to boast about. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Zhonglu.Co.Ltd?

In order to justify its P/S ratio, Zhonglu.Co.Ltd would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Regardless, revenue has managed to lift by a handy 28% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Zhonglu.Co.Ltd is trading at a P/S higher than the industry. 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.

The Bottom Line On Zhonglu.Co.Ltd's P/S

Zhonglu.Co.Ltd's shares may have suffered, but its P/S remains high. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Zhonglu.Co.Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Zhonglu.Co.Ltd (2 are potentially serious!) that you should be aware of.

If you're unsure about the strength of Zhonglu.Co.Ltd'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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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.