China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) Stocks Pounded By 27% But Not Lagging Industry On Growth Or Pricing

The China Reform Health Management and Services Group Co., Ltd. (SZSE:000503) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.

In spite of the heavy fall in price, you could still be forgiven for thinking China Reform Health Management and Services Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 26.7x, considering almost half the companies in China's Healthcare industry have P/S ratios below 1.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for China Reform Health Management and Services Group

How Has China Reform Health Management and Services Group Performed Recently?

The revenue growth achieved at China Reform Health Management and Services Group over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for China Reform Health Management and Services Group, 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?

In order to justify its P/S ratio, China Reform Health Management and Services Group would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 9.5% gain to the company's revenues. Pleasingly, revenue has also lifted 54% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 13% shows it's noticeably more attractive.

With this information, we can see why China Reform Health Management and Services Group is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Key Takeaway

A significant share price dive has done very little to deflate China Reform Health Management and Services Group's very lofty P/S. 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.

It's no surprise that China Reform Health Management and Services Group can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for China Reform Health Management and Services Group that you should be aware of.

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.