What Jiangsu Sihuan Bioengineering Co., Ltd's (SZSE:000518) 33% Share Price Gain Is Not Telling You

Despite an already strong run, Jiangsu Sihuan Bioengineering Co., Ltd (SZSE:000518) shares have been powering on, with a gain of 33% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.6% in the last twelve months.

After such a large jump in price, when almost half of the companies in China's Biotechs industry have price-to-sales ratios (or "P/S") below 7.2x, you may consider Jiangsu Sihuan Bioengineering as a stock not worth researching with its 13.8x 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 Jiangsu Sihuan Bioengineering

How Has Jiangsu Sihuan Bioengineering Performed Recently?

As an illustration, revenue has deteriorated at Jiangsu Sihuan Bioengineering over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jiangsu Sihuan Bioengineering will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Jiangsu Sihuan Bioengineering would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. This means it has also seen a slide in revenue over the longer-term as revenue is down 47% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 238% shows it's an unpleasant look.

In light of this, it's alarming that Jiangsu Sihuan Bioengineering's P/S sits above the majority of other companies. 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. 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.

The Final Word

The strong share price surge has lead to Jiangsu Sihuan Bioengineering'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.

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. 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.

Having said that, be aware Jiangsu Sihuan Bioengineering is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.