Risks To Shareholder Returns Are Elevated At These Prices For Xinjiang Tianshan Animal Husbandry Bio-engineering Co., Ltd. (SZSE:300313)

Xinjiang Tianshan Animal Husbandry Bio-engineering Co., Ltd.'s (SZSE:300313) price-to-sales (or "P/S") ratio of 12.2x may look like a poor investment opportunity when you consider close to half the companies in the Biotechs industry in China have P/S ratios below 6.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Xinjiang Tianshan Animal Husbandry Bio-engineering

How Has Xinjiang Tianshan Animal Husbandry Bio-engineering Performed Recently?

The revenue growth achieved at Xinjiang Tianshan Animal Husbandry Bio-engineering over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Xinjiang Tianshan Animal Husbandry Bio-engineering's earnings, revenue and cash flow.

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

Xinjiang Tianshan Animal Husbandry Bio-engineering's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow revenue by 63% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 56% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Xinjiang Tianshan Animal Husbandry Bio-engineering's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Xinjiang Tianshan Animal Husbandry Bio-engineering currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Xinjiang Tianshan Animal Husbandry Bio-engineering with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Xinjiang Tianshan Animal Husbandry Bio-engineering, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.