LingNan Eco&Culture-Tourism Co.,Ltd. (SZSE:002717) shares have continued their recent momentum with a 49% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 43%.

Following the firm bounce in price, given around half the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider LingNan Eco&Culture-TourismLtd as a stock to avoid entirely with its 6.4x 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 LingNan Eco&Culture-TourismLtd's P/S Mean For Shareholders?

For instance, LingNan Eco&Culture-TourismLtd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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?

The only time you'd be truly comfortable seeing a P/S as steep as LingNan Eco&Culture-TourismLtd's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 48%. As a result, revenue from three years ago have also fallen 76% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this in mind, we find it worrying that LingNan Eco&Culture-TourismLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate 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.

The Final Word

LingNan Eco&Culture-TourismLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that LingNan Eco&Culture-TourismLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with LingNan Eco&Culture-TourismLtd (at least 3 which are concerning), and understanding them should be part of your investment process.

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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