Despite an already strong run, Guangdong Guangzhou Daily Media Co., Ltd. (SZSE:002181) shares have been powering on, with a gain of 26% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.9% over the last year.

Following the firm bounce in price, given around half the companies in China's Media industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Guangdong Guangzhou Daily Media as a stock to avoid entirely with its 9.9x 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.

What Does Guangdong Guangzhou Daily Media's Recent Performance Look Like?

The recent revenue growth at Guangdong Guangzhou Daily Media would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough 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.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Guangdong Guangzhou Daily Media's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 4.9% gain to the company's revenues. The latest three year period has also seen a 12% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Guangdong Guangzhou Daily Media's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Guangdong Guangzhou Daily Media's P/S?

Shares in Guangdong Guangzhou Daily Media have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Guangdong Guangzhou Daily Media currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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. 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 settle on your opinion, we've discovered 2 warning signs for Guangdong Guangzhou Daily Media that you should be aware of.

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.

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