What Sino Medical Sciences Technology Inc.'s (SHSE:688108) P/S Is Not Telling You

Sino Medical Sciences Technology Inc.'s (SHSE:688108) price-to-sales (or "P/S") ratio of 12.3x might make it look like a strong sell right now compared to the Medical Equipment industry in China, where around half of the companies have P/S ratios below 6.3x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Sino Medical Sciences Technology

How Sino Medical Sciences Technology Has Been Performing

With revenue growth that's exceedingly strong of late, Sino Medical Sciences Technology has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Sino Medical Sciences Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Sino Medical Sciences Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 75% gain to the company's top line. Revenue has also lifted 28% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 28% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Sino Medical Sciences Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Sino Medical Sciences Technology'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 Sino Medical Sciences Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Sino Medical Sciences Technology.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.