BrightGene Bio-Medical Technology Co., Ltd.'s (SHSE:688166) 47% Share Price Surge Not Quite Adding Up

BrightGene Bio-Medical Technology Co., Ltd. (SHSE:688166) shares have had a really impressive month, gaining 47% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

Since its price has surged higher, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider BrightGene Bio-Medical Technology as a stock not worth researching with its 13.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for BrightGene Bio-Medical Technology

What Does BrightGene Bio-Medical Technology's Recent Performance Look Like?

Revenue has risen firmly for BrightGene Bio-Medical Technology recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For BrightGene Bio-Medical Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like BrightGene Bio-Medical Technology's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. Pleasingly, revenue has also lifted 44% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 19% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that BrightGene Bio-Medical Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does BrightGene Bio-Medical Technology's P/S Mean For Investors?

The strong share price surge has lead to BrightGene Bio-Medical Technology's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of BrightGene Bio-Medical Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware BrightGene Bio-Medical Technology is showing 2 warning signs in our investment analysis, and 1 of those is significant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.