There Is A Reason Zhonghong Pulin Medical Products Co., Ltd.'s (SZSE:300981) Price Is Undemanding

Zhonghong Pulin Medical Products Co., Ltd.'s (SZSE:300981) price-to-sales (or "P/S") ratio of 2.6x might make it look like a strong buy right now compared to the Medical Equipment industry in China, where around half of the companies have P/S ratios above 6.6x and even P/S above 10x 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.

Check out our latest analysis for Zhonghong Pulin Medical Products

How Has Zhonghong Pulin Medical Products Performed Recently?

Revenue has risen firmly for Zhonghong Pulin Medical Products recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Zhonghong Pulin Medical Products 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 Zhonghong Pulin Medical Products' earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Zhonghong Pulin Medical Products would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.7%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 60% in total over the last three years. 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 26% shows it's an unpleasant look.

With this information, we are not surprised that Zhonghong Pulin Medical Products 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 Zhonghong Pulin Medical Products' P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhonghong Pulin Medical Products confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 4 warning signs for Zhonghong Pulin Medical Products (2 can't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Zhonghong Pulin Medical Products, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.