With a median price-to-sales (or "P/S") ratio of close to 9x in the Biotechs industry in Hong Kong, you could be forgiven for feeling indifferent about Shandong Boan Biotechnology Co., Ltd.'s (HKG:6955) P/S ratio of 7.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for Shandong Boan Biotechnology
Shandong Boan Biotechnology could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
There's an inherent assumption that a company should be matching the industry for P/S ratios like Shandong Boan Biotechnology's to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 20% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should generate growth of 40% per annum as estimated by the only analyst watching the company. With the industry predicted to deliver 69% growth per annum, the company is positioned for a weaker revenue result.
With this in mind, we find it intriguing that Shandong Boan Biotechnology's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Given that Shandong Boan Biotechnology'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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You always need to take note of risks, for example - Shandong Boan Biotechnology has 1 warning sign we think you should be aware of.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Find out whether Shandong Boan Biotechnology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
Recommendation and review posted by G. Smith
