Joinn Laboratories(China)Co.,Ltd.'s (SHSE:603127) 28% Share Price Surge Not Quite Adding Up

Joinn Laboratories(China)Co.,Ltd. (SHSE:603127) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Following the firm bounce in price, when almost half of the companies in China's Life Sciences industry have price-to-sales ratios (or "P/S") below 4.5x, you may consider Joinn Laboratories(China)Co.Ltd as a stock probably not worth researching with its 6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Joinn Laboratories(China)Co.Ltd

What Does Joinn Laboratories(China)Co.Ltd's P/S Mean For Shareholders?

Joinn Laboratories(China)Co.Ltd has been struggling lately as its revenue has declined faster than most other companies. It might be that many expect the dismal revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Joinn Laboratories(China)Co.Ltd will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Joinn Laboratories(China)Co.Ltd?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Joinn Laboratories(China)Co.Ltd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. Even so, admirably revenue has lifted 82% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 5.7% during the coming year according to the ten analysts following the company. With the industry predicted to deliver 15% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Joinn Laboratories(China)Co.Ltd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Joinn Laboratories(China)Co.Ltd's P/S Mean For Investors?

The large bounce in Joinn Laboratories(China)Co.Ltd's shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Joinn Laboratories(China)Co.Ltd, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Joinn Laboratories(China)Co.Ltd is showing 4 warning signs in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.