There's Reason For Concern Over Dezhan Healthcare Company Limited's (SZSE:000813) Massive 34% Price Jump

Dezhan Healthcare Company Limited (SZSE:000813) shares have continued their recent momentum with a 34% gain in the last month alone. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.8x, you may consider Dezhan Healthcare as a stock to avoid entirely with its 17.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Dezhan Healthcare

How Dezhan Healthcare Has Been Performing

Dezhan Healthcare has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. 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 Dezhan Healthcare, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Dezhan Healthcare's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 5.7% gain to the company's revenues. Still, lamentably revenue has fallen 19% in aggregate from three years ago, which is disappointing. 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 211% shows it's an unpleasant look.

With this information, we find it concerning that Dezhan Healthcare is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Dezhan Healthcare's P/S?

Dezhan Healthcare's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Dezhan Healthcare 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Dezhan Healthcare (1 is significant!) that we have uncovered.

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.