China Ruyi Holdings Limited (HKG:136) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Since its price has surged higher, you could be forgiven for thinking China Ruyi Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.8x, considering almost half the companies in Hong Kong's Entertainment industry have P/S ratios below 1.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for China Ruyi Holdings

What Does China Ruyi Holdings' P/S Mean For Shareholders?

Recent times haven't been great for China Ruyi Holdings as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think China Ruyi Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For China Ruyi Holdings?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Still, the latest three year period has seen an excellent 58% overall rise in revenue, in spite of its uninspiring short-term performance. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Looking ahead now, revenue is anticipated to climb by 21% per annum during the coming three years according to the dual analysts following the company. That's shaping up to be materially higher than the 10.0% per annum growth forecast for the broader industry.

With this information, we can see why China Ruyi Holdings is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does China Ruyi Holdings' P/S Mean For Investors?

China Ruyi Holdings' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

As we suspected, our examination of China Ruyi Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware China Ruyi Holdings is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of China Ruyi Holdings' 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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