There wouldn't be many who think Huangshan Tourism Development Co.,Ltd.'s (SHSE:600054) price-to-sales (or "P/S") ratio of 4.6x is worth a mention when the median P/S for the Hospitality industry in China is similar at about 5.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Huangshan Tourism DevelopmentLtd Has Been Performing

Recent times haven't been great for Huangshan Tourism DevelopmentLtd as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Huangshan Tourism DevelopmentLtd.

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

In order to justify its P/S ratio, Huangshan Tourism DevelopmentLtd would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 91% last year. The latest three year period has also seen an excellent 136% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 11% as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 28% growth forecast for the broader industry.

In light of this, it's curious that Huangshan Tourism DevelopmentLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Huangshan Tourism DevelopmentLtd's P/S?

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.

Given that Huangshan Tourism DevelopmentLtd's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Huangshan Tourism DevelopmentLtd, and understanding should be part of your investment process.

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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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.