Some Shanghai Kai Kai Industry Company Limited (SHSE:600272) Shareholders Look For Exit As Shares Take 27% Pounding

Shanghai Kai Kai Industry Company Limited (SHSE:600272) shares have had a horrible month, losing 27% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Although its price has dipped substantially, there still wouldn't be many who think Shanghai Kai Kai Industry's price-to-sales (or "P/S") ratio of 3.1x is worth a mention when the median P/S in China's Pharmaceuticals industry is similar at about 3.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Shanghai Kai Kai Industry

What Does Shanghai Kai Kai Industry's P/S Mean For Shareholders?

For instance, Shanghai Kai Kai Industry's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shanghai Kai Kai Industry's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 7.5% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing that to the industry, which is predicted to deliver 18% 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 somewhat alarming that Shanghai Kai Kai Industry's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Shanghai Kai Kai Industry's P/S?

With its share price dropping off a cliff, the P/S for Shanghai Kai Kai Industry looks to be in line with the rest of the Pharmaceuticals 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.

Our look at Shanghai Kai Kai Industry revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Shanghai Kai Kai Industry you should be aware of, and 1 of them is a bit unpleasant.

If these risks are making you reconsider your opinion on Shanghai Kai Kai Industry, 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.