Shenzhen Hepalink Pharmaceutical Group Co., Ltd.'s (SZSE:002399) Price Is Out Of Tune With Revenues

There wouldn't be many who think Shenzhen Hepalink Pharmaceutical Group Co., Ltd.'s (SZSE:002399) price-to-sales (or "P/S") ratio of 3.1x is worth a mention when the median P/S for the Pharmaceuticals industry in China is similar at about 3.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Shenzhen Hepalink Pharmaceutical Group

What Does Shenzhen Hepalink Pharmaceutical Group's P/S Mean For Shareholders?

Shenzhen Hepalink Pharmaceutical Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen Hepalink Pharmaceutical Group will help you uncover what's on the horizon.

How Is Shenzhen Hepalink Pharmaceutical Group's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shenzhen Hepalink Pharmaceutical Group's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 6.5% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 15% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 4.5% per annum as estimated by the lone analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 101% per year, which is noticeably more attractive.

With this information, we find it interesting that Shenzhen Hepalink Pharmaceutical Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Shenzhen Hepalink Pharmaceutical Group's P/S Mean For Investors?

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.

When you consider that Shenzhen Hepalink Pharmaceutical 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. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Shenzhen Hepalink Pharmaceutical Group with six simple checks on some of these key factors.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.