Guanhao Biotech Co.,Ltd.'s (SZSE:300238) 26% Share Price Plunge Could Signal Some Risk

Guanhao Biotech Co.,Ltd. (SZSE:300238) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 31% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Guanhao BiotechLtd's price-to-sales (or "P/S") ratio of 5.9x is worth a mention when the median P/S in China's Biotechs industry is similar at about 6.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Guanhao BiotechLtd

What Does Guanhao BiotechLtd's P/S Mean For Shareholders?

The recent revenue growth at Guanhao BiotechLtd would have to be considered satisfactory if not spectacular. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Guanhao BiotechLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Guanhao BiotechLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.0%. Still, lamentably revenue has fallen 7.5% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 181% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Guanhao BiotechLtd's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

Following Guanhao BiotechLtd's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

Our look at Guanhao BiotechLtd revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Guanhao BiotechLtd with six simple checks will allow you to discover any risks that could be an issue.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.