Zhonghong Pulin Medical Products Co., Ltd.'s (SZSE:300981) Revenues Are Not Doing Enough For Some Investors

You may think that with a price-to-sales (or "P/S") ratio of 1.8x Zhonghong Pulin Medical Products Co., Ltd. (SZSE:300981) is definitely a stock worth checking out, seeing as almost half of all the Medical Equipment companies in China have P/S ratios greater than 4.9x and even P/S above 8x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zhonghong Pulin Medical Products

How Zhonghong Pulin Medical Products Has Been Performing

Recent times have been quite advantageous for Zhonghong Pulin Medical Products as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. 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.

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

How Is Zhonghong Pulin Medical Products' Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Zhonghong Pulin Medical Products' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 37% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 69% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 27% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Zhonghong Pulin Medical Products' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. 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

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 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.

Having said that, be aware Zhonghong Pulin Medical Products is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.