Shanghai Kinetic Medical Co., Ltd (SZSE:300326) Held Back By Insufficient Growth Even After Shares Climb 30%

Shanghai Kinetic Medical Co., Ltd (SZSE:300326) shares have continued their recent momentum with a 30% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 3.0% isn't as attractive.

In spite of the firm bounce in price, it would still be understandable if you think Shanghai Kinetic Medical is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 5.1x, considering almost half the companies in China's Medical Equipment industry have P/S ratios above 6.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Shanghai Kinetic Medical

How Shanghai Kinetic Medical Has Been Performing

We'd have to say that with no tangible growth over the last year, Shanghai Kinetic Medical's revenue has been unimpressive. It might be that many expect the uninspiring revenue performance to worsen, which has repressed the P/S. Those who are bullish on Shanghai Kinetic Medical will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Shanghai Kinetic Medical, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shanghai Kinetic Medical's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Shanghai Kinetic Medical's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. This isn't what shareholders were looking for as it means they've been left with a 22% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Shanghai Kinetic Medical's P/S would sit below the majority of other companies. 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 Final Word

The latest share price surge wasn't enough to lift Shanghai Kinetic Medical's P/S close to the industry median. 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.

It's no surprise that Shanghai Kinetic Medical maintains its low P/S off the back of its sliding revenue over the medium-term. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Shanghai Kinetic Medical (1 is a bit unpleasant!) that you need to be mindful 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.