China Star Entertainment Limited's (HKG:326) P/S Is Still On The Mark Following 60% Share Price Bounce

China Star Entertainment Limited (HKG:326) shareholders have had their patience rewarded with a 60% share price jump in the last month. The annual gain comes to 269% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in Hong Kong's Entertainment industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider China Star Entertainment as a stock to avoid entirely with its 7.6x 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.

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Check out our latest analysis for China Star Entertainment

How China Star Entertainment Has Been Performing

China Star Entertainment certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is China Star Entertainment's Revenue Growth Trending?

China Star Entertainment's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 12% shows it's noticeably more attractive.

In light of this, it's understandable that China Star Entertainment's P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Final Word

The strong share price surge has lead to China Star Entertainment's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of China Star Entertainment revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Having said that, be aware China Star Entertainment is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on China Star Entertainment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.