What You Can Learn From Shandong Sanyuan Biotechnology Co.,Ltd.'s (SZSE:301206) P/S

Shandong Sanyuan Biotechnology Co.,Ltd.'s (SZSE:301206) price-to-sales (or "P/S") ratio of 11.5x may look like a poor investment opportunity when you consider close to half the companies in the Food industry in China have P/S ratios below 1.8x. 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.

Check out our latest analysis for Shandong Sanyuan BiotechnologyLtd

How Has Shandong Sanyuan BiotechnologyLtd Performed Recently?

Shandong Sanyuan BiotechnologyLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shandong Sanyuan BiotechnologyLtd.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 50% decrease to the company's top line. As a result, revenue from three years ago have also fallen 35% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 36% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 16%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Shandong Sanyuan BiotechnologyLtd's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shandong Sanyuan BiotechnologyLtd's P/S?

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.

We've established that Shandong Sanyuan BiotechnologyLtd maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Food industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Shandong Sanyuan BiotechnologyLtd is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If you're unsure about the strength of Shandong Sanyuan BiotechnologyLtd's 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.