Hithink RoyalFlush Information Network Co., Ltd. (SZSE:300033) shares have continued their recent momentum with a 67% gain in the last month alone. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in China's Capital Markets industry have price-to-sales ratios (or "P/S") below 8.3x, you may consider Hithink RoyalFlush Information Network as a stock to avoid entirely with its 46.3x 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 Hithink RoyalFlush Information Network Has Been Performing

Hithink RoyalFlush Information Network hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Hithink RoyalFlush Information Network's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Hithink RoyalFlush Information Network's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the eleven analysts following the company. With the industry only predicted to deliver 18%, the company is positioned for a stronger revenue result.

With this information, we can see why Hithink RoyalFlush Information Network is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to Hithink RoyalFlush Information Network's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look into Hithink RoyalFlush Information Network shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hithink RoyalFlush Information Network (of which 1 is significant!) you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.