Optimistic Investors Push Hangzhou Alltest Biotech Co., Ltd. (SHSE:688606) Shares Up 27% But Growth Is Lacking

Hangzhou Alltest Biotech Co., Ltd. (SHSE:688606) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, Hangzhou Alltest Biotech may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 7.7x, since almost half of all companies in the Medical Equipment in China have P/S ratios under 6x and even P/S lower than 3x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Hangzhou Alltest Biotech

What Does Hangzhou Alltest Biotech's Recent Performance Look Like?

For instance, Hangzhou Alltest Biotech'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. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou Alltest Biotech's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hangzhou Alltest Biotech?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 78%. This means it has also seen a slide in revenue over the longer-term as revenue is down 34% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Hangzhou Alltest Biotech 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.

The Final Word

The large bounce in Hangzhou Alltest Biotech's shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Hangzhou Alltest Biotech currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hangzhou Alltest Biotech (at least 1 which is concerning), and understanding them should be part of your investment process.

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.