Dizal (Jiangsu) Pharmaceutical Co., Ltd.'s (SHSE:688192) Share Price Could Signal Some Risk

When close to half the companies in the Biotechs industry in China have price-to-sales ratios (or "P/S") below 7.2x, you may consider Dizal (Jiangsu) Pharmaceutical Co., Ltd. (SHSE:688192) as a stock to avoid entirely with its 45.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Dizal (Jiangsu) Pharmaceutical

How Has Dizal (Jiangsu) Pharmaceutical Performed Recently?

Dizal (Jiangsu) Pharmaceutical certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Dizal (Jiangsu) Pharmaceutical's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Dizal (Jiangsu) Pharmaceutical's to be considered reasonable.

Retrospectively, the last year delivered an explosive gain to the company's top line. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 102% per annum as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 179% per annum growth forecast for the broader industry.

With this information, we find it concerning that Dizal (Jiangsu) Pharmaceutical is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

The Bottom Line On Dizal (Jiangsu) Pharmaceutical's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that Dizal (Jiangsu) Pharmaceutical currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you settle on your opinion, we've discovered 2 warning signs for Dizal (Jiangsu) Pharmaceutical that you should be aware of.

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.