Why Investors Shouldn't Be Surprised By Jiangsu Skyray Instrument Co., Ltd.'s (SZSE:300165) 28% Share Price Plunge

To the annoyance of some shareholders, Jiangsu Skyray Instrument Co., Ltd. (SZSE:300165) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 35% in that time.

Following the heavy fall in price, Jiangsu Skyray Instrument's price-to-sales (or "P/S") ratio of 1.4x might 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 5.8x and even P/S above 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Jiangsu Skyray Instrument

What Does Jiangsu Skyray Instrument's P/S Mean For Shareholders?

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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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 Jiangsu Skyray Instrument's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as depressed as Jiangsu Skyray Instrument's is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 8.7%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 40% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Jiangsu Skyray Instrument is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Jiangsu Skyray Instrument's P/S?

Having almost fallen off a cliff, Jiangsu Skyray Instrument's share price has pulled its P/S way down as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Jiangsu Skyray Instrument confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Jiangsu Skyray Instrument that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.