Revenues Working Against Improve Medical Instruments Co., Ltd.'s (SZSE:300030) Share Price Following 26% Dive

The Improve Medical Instruments Co., Ltd. (SZSE:300030) share price has fared very poorly over the last month, falling by a substantial 26%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 51% loss during that time.

Following the heavy fall in price, given close to half the companies in China's Life Sciences industry have price-to-sales ratios (or "P/S") above 5.1x, you may consider Improve Medical Instruments as a highly attractive investment with its 1.8x 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 limited.

Check out our latest analysis for Improve Medical Instruments

What Does Improve Medical Instruments' Recent Performance Look Like?

For example, consider that Improve Medical Instruments' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Improve Medical Instruments will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Improve Medical Instruments' earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Improve Medical Instruments?

In order to justify its P/S ratio, Improve Medical Instruments would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 9.1% decrease to the company's top line. As a result, revenue from three years ago have also fallen 37% overall. 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 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Improve Medical Instruments is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Having almost fallen off a cliff, Improve Medical Instruments' share price has pulled its P/S way down 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.

It's no surprise that Improve Medical Instruments maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You should always think about risks. Case in point, we've spotted 2 warning signs for Improve Medical Instruments you should be aware of, and 1 of them makes us a bit uncomfortable.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.