Risks Still Elevated At These Prices As Landfar Bio-medicine Co., Ltd (SZSE:000504) Shares Dive 31%

Landfar Bio-medicine Co., Ltd (SZSE:000504) shareholders won't be pleased to see that the share price has had a very rough month, dropping 31% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.

Even after such a large drop in price, when almost half of the companies in China's Biotechs industry have price-to-sales ratios (or "P/S") below 6.6x, you may still consider Landfar Bio-medicine as a stock not worth researching with its 17.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Landfar Bio-medicine

How Has Landfar Bio-medicine Performed Recently?

For instance, Landfar Bio-medicine's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 Landfar Bio-medicine, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Landfar Bio-medicine's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Landfar Bio-medicine's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 33% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 253% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Landfar Bio-medicine is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Landfar Bio-medicine's P/S

Even after such a strong price drop, Landfar Bio-medicine's P/S still exceeds the industry median significantly. 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 Landfar Bio-medicine revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 3 warning signs for Landfar Bio-medicine (2 are a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of Landfar Bio-medicine'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.