More Unpleasant Surprises Could Be In Store For Jiangsu Sihuan Bioengineering Co., Ltd's (SZSE:000518) Shares After Tumbling 26%

To the annoyance of some shareholders, Jiangsu Sihuan Bioengineering Co., Ltd (SZSE:000518) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 30% share price drop.

Even after such a large drop in price, you could still be forgiven for thinking Jiangsu Sihuan Bioengineering is a stock not worth researching with a price-to-sales ratios (or "P/S") of 8.2x, considering almost half the companies in China's Biotechs industry have P/S ratios below 6.5x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangsu Sihuan Bioengineering

What Does Jiangsu Sihuan Bioengineering's P/S Mean For Shareholders?

For instance, Jiangsu Sihuan Bioengineering'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 Jiangsu Sihuan Bioengineering, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Jiangsu Sihuan Bioengineering's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 19%. This means it has also seen a slide in revenue over the longer-term as revenue is down 48% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 175% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Jiangsu Sihuan Bioengineering's P/S exceeds that of its industry peers. 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 Jiangsu Sihuan Bioengineering's P/S

There's still some elevation in Jiangsu Sihuan Bioengineering's P/S, even if the same can't be said for its share price recently. 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 established that Jiangsu Sihuan Bioengineering currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You always need to take note of risks, for example - Jiangsu Sihuan Bioengineering has 1 warning sign we think you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.