There's Reason For Concern Over Staidson (Beijing) BioPharmaceuticals Co., Ltd.'s (SZSE:300204) Massive 26% Price Jump

Staidson (Beijing) BioPharmaceuticals Co., Ltd. (SZSE:300204) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Staidson (Beijing) BioPharmaceuticals is a stock not worth researching with a price-to-sales ratios (or "P/S") of 8.9x, considering almost half the companies in China's Biotechs industry have P/S ratios below 6.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Staidson (Beijing) BioPharmaceuticals

What Does Staidson (Beijing) BioPharmaceuticals' P/S Mean For Shareholders?

For example, consider that Staidson (Beijing) BioPharmaceuticals' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Staidson (Beijing) BioPharmaceuticals will help you shine a light on its historical performance.

How Is Staidson (Beijing) BioPharmaceuticals' Revenue Growth Trending?

Staidson (Beijing) BioPharmaceuticals' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. The last three years don't look nice either as the company has shrunk revenue by 19% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 263% 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 Staidson (Beijing) BioPharmaceuticals' 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. 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 large bounce in Staidson (Beijing) BioPharmaceuticals' shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Staidson (Beijing) BioPharmaceuticals 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. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Staidson (Beijing) BioPharmaceuticals (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

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.

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