Despite an already strong run, Panda Financial Holding Corp., Ltd. (SHSE:600599) shares have been powering on, with a gain of 29% in the last thirty days. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, you could be forgiven for thinking Panda Financial Holding is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.1x, considering almost half the companies in China's Consumer Finance industry have P/S ratios below 3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Panda Financial Holding Performed Recently?

For example, consider that Panda Financial Holding's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

Retrospectively, the last year delivered a frustrating 2.9% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 9.7% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 36% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Panda Financial Holding's 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.

The Final Word

The strong share price surge has lead to Panda Financial Holding'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 examination of Panda Financial Holding revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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.

Before you take the next step, you should know about the 1 warning sign for Panda Financial Holding that we have uncovered.

If you're unsure about the strength of Panda Financial Holding'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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