Despite an already strong run, iDreamSky Technology Holdings Limited (HKG:1119) shares have been powering on, with a gain of 30% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.4% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking iDreamSky Technology Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.3x, considering almost half the companies in Hong Kong's Entertainment industry have P/S ratios below 1.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does iDreamSky Technology Holdings' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, iDreamSky Technology Holdings' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For iDreamSky Technology Holdings?

iDreamSky Technology Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 30%. As a result, revenue from three years ago have also fallen 40% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 62% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 20% growth forecast for the broader industry.

In light of this, it's understandable that iDreamSky Technology Holdings' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does iDreamSky Technology Holdings' P/S Mean For Investors?

The large bounce in iDreamSky Technology Holdings' shares has lifted the company's P/S handsomely. 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.

Our look into iDreamSky Technology Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for iDreamSky Technology Holdings that we have uncovered.

If you're unsure about the strength of iDreamSky Technology 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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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.