There's Reason For Concern Over Beijing Hotgen Biotech Co., Ltd.'s (SHSE:688068) Massive 28% Price Jump

Beijing Hotgen Biotech Co., Ltd. (SHSE:688068) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 41% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Beijing Hotgen Biotech's price-to-sales (or "P/S") ratio of 5.2x right now seems quite "middle-of-the-road" compared to the Life Sciences industry in China, where the median P/S ratio is around 5.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Beijing Hotgen Biotech

What Does Beijing Hotgen Biotech's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Beijing Hotgen Biotech over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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.

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

How Is Beijing Hotgen Biotech's Revenue Growth Trending?

Beijing Hotgen Biotech's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 85%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 5.4% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Beijing Hotgen Biotech's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now Beijing Hotgen Biotech's P/S is back within range of the industry median. 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 Beijing Hotgen Biotech revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Beijing Hotgen Biotech that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.