What Assure Tech (Hangzhou) Co., Ltd.'s (SHSE:688075) P/S Is Not Telling You

You may think that with a price-to-sales (or "P/S") ratio of 9.1x Assure Tech (Hangzhou) Co., Ltd. (SHSE:688075) is a stock to potentially avoid, seeing as almost half of all the Medical Equipment companies in China have P/S ratios under 6.2x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Assure Tech (Hangzhou)

What Does Assure Tech (Hangzhou)'s Recent Performance Look Like?

For instance, Assure Tech (Hangzhou)'s receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Assure Tech (Hangzhou), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Assure Tech (Hangzhou)'s Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Assure Tech (Hangzhou)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 92% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 58% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 29% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Assure Tech (Hangzhou)'s P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Assure Tech (Hangzhou)'s P/S

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 examination of Assure Tech (Hangzhou) revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 3 warning signs for Assure Tech (Hangzhou) (2 are concerning!) that you need to take into consideration.

If you're unsure about the strength of Assure Tech (Hangzhou)'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.