Guangzheng Eye Hospital Group Co.,Ltd. (SZSE:002524) May Have Run Too Fast Too Soon With Recent 28% Price Plummet

The Guangzheng Eye Hospital Group Co.,Ltd. (SZSE:002524) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 50% share price drop.

Even after such a large drop in price, there still wouldn't be many who think Guangzheng Eye Hospital GroupLtd's price-to-sales (or "P/S") ratio of 1.5x is worth a mention when the median P/S in China's Healthcare industry is similar at about 1.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Guangzheng Eye Hospital GroupLtd

What Does Guangzheng Eye Hospital GroupLtd's P/S Mean For Shareholders?

Guangzheng Eye Hospital GroupLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. Those who are bullish on Guangzheng Eye Hospital GroupLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Guangzheng Eye Hospital GroupLtd's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Guangzheng Eye Hospital GroupLtd would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 33% last year. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Guangzheng Eye Hospital GroupLtd is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Guangzheng Eye Hospital GroupLtd looks to be in line with the rest of the Healthcare industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Guangzheng Eye Hospital GroupLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Guangzheng Eye Hospital GroupLtd that you need to be mindful 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.