Ciwen Media Co.,Ltd. (SZSE:002343) shares have had a really impressive month, gaining 41% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

After such a large jump in price, Ciwen MediaLtd's price-to-sales (or "P/S") ratio of 10.2x might make it look like a sell right now compared to the wider Entertainment industry in China, where around half of the companies have P/S ratios below 7.1x and even P/S below 3x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Ciwen MediaLtd's P/S Mean For Shareholders?

The revenue growth achieved at Ciwen MediaLtd over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Ciwen MediaLtd?

The only time you'd be truly comfortable seeing a P/S as high as Ciwen MediaLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 22% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 31% shows it's an unpleasant look.

With this information, we find it concerning that Ciwen MediaLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Ciwen MediaLtd's P/S?

Ciwen MediaLtd's P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Ciwen MediaLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Ciwen MediaLtd that you should be aware of.

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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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.