Goldlok Holdings(Guangdong) Co.,Ltd. (SZSE:002348) shares have continued their recent momentum with a 29% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Since its price has surged higher, when almost half of the companies in China's Leisure industry have price-to-sales ratios (or "P/S") below 3x, you may consider Goldlok Holdings(Guangdong)Ltd as a stock not worth researching with its 12.5x 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.

What Does Goldlok Holdings(Guangdong)Ltd's P/S Mean For Shareholders?

For instance, Goldlok Holdings(Guangdong)Ltd's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Goldlok Holdings(Guangdong)Ltd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 7.7% 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 45% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Goldlok Holdings(Guangdong)Ltd'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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Goldlok Holdings(Guangdong)Ltd's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Goldlok Holdings(Guangdong)Ltd 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Goldlok Holdings(Guangdong)Ltd with six simple checks.

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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