Subdued Growth No Barrier To Guanhao Biotech Co.,Ltd. (SZSE:300238) With Shares Advancing 38%

Guanhao Biotech Co.,Ltd. (SZSE:300238) shares have continued their recent momentum with a 38% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 3.7% isn't as impressive.

Following the firm bounce in price, you could be forgiven for thinking Guanhao BiotechLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 9.4x, considering almost half the companies in China's Biotechs industry have P/S ratios below 6.8x. 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 Guanhao BiotechLtd

How Guanhao BiotechLtd Has Been Performing

We'd have to say that with no tangible growth over the last year, Guanhao BiotechLtd's revenue has been unimpressive. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

How Is Guanhao BiotechLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Guanhao BiotechLtd would need to produce impressive growth in excess of the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 23% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 223% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Guanhao BiotechLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Guanhao BiotechLtd's P/S?

Guanhao BiotechLtd's P/S is on the rise since its shares have risen strongly. 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.

We've established that Guanhao BiotechLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

You always need to take note of risks, for example - Guanhao BiotechLtd has 1 warning sign we think you should be aware of.

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.