Changbai Mountain Tourism Co., Ltd. (SHSE:603099) shares have continued their recent momentum with a 34% gain in the last month alone. The annual gain comes to 196% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Changbai Mountain Tourism's price-to-sales (or "P/S") ratio of 15.1x might make it look like a strong sell right now compared to other companies in the Hospitality industry in China, where around half of the companies have P/S ratios below 5.5x 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 so lofty.

What Does Changbai Mountain Tourism's Recent Performance Look Like?

Recent times have been advantageous for Changbai Mountain Tourism 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Changbai Mountain Tourism's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 35%. The strong recent performance means it was also able to grow revenue by 246% 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.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 13% over the next year. With the industry predicted to deliver 35% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Changbai Mountain Tourism's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Changbai Mountain Tourism have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It comes as a surprise to see Changbai Mountain Tourism trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Changbai Mountain Tourism with six simple checks on some of these key factors.

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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