There's Reason For Concern Over Sinocelltech Group Limited's (SHSE:688520) Price

With a median price-to-sales (or "P/S") ratio of close to 5.5x in the Biotechs industry in China, you could be forgiven for feeling indifferent about Sinocelltech Group Limited's (SHSE:688520) P/S ratio of 6.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Sinocelltech Group

How Sinocelltech Group Has Been Performing

Recent times have been advantageous for Sinocelltech Group as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sinocelltech Group.

Is There Some Revenue Growth Forecasted For Sinocelltech Group?

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

Retrospectively, the last year delivered an exceptional 64% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 30% as estimated by the only analyst watching the company. With the industry predicted to deliver 222% growth, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Sinocelltech Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Sinocelltech Group's P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that Sinocelltech Group's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Sinocelltech Group you should know about.

If you're unsure about the strength of Sinocelltech Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.