Jiangsu Skyray Instrument Co., Ltd. (SZSE:300165) Shares Fly 40% But Investors Aren't Buying For Growth

Despite an already strong run, Jiangsu Skyray Instrument Co., Ltd. (SZSE:300165) shares have been powering on, with a gain of 40% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

In spite of the firm bounce in price, Jiangsu Skyray Instrument's price-to-sales (or "P/S") ratio of 1.9x might still make it look like a strong buy right now compared to the wider Medical Equipment industry in China, where around half of the companies have P/S ratios above 5.4x and even P/S above 9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Jiangsu Skyray Instrument

How Has Jiangsu Skyray Instrument Performed Recently?

As an illustration, revenue has deteriorated at Jiangsu Skyray Instrument over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. Those who are bullish on Jiangsu Skyray Instrument will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jiangsu Skyray Instrument will help you shine a light on its historical performance.

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Jiangsu Skyray Instrument'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 32%. The last three years don't look nice either as the company has shrunk revenue by 7.2% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 27% shows it's an unpleasant look.

With this information, we are not surprised that Jiangsu Skyray Instrument is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Jiangsu Skyray Instrument's P/S

Even after such a strong price move, Jiangsu Skyray Instrument's P/S still trails the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Jiangsu Skyray Instrument revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Jiangsu Skyray Instrument that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.