Shandong Sito Bio-technology Co., Ltd.'s (SZSE:300583) 33% Share Price Surge Not Quite Adding Up

Shandong Sito Bio-technology Co., Ltd. (SZSE:300583) shareholders have had their patience rewarded with a 33% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Although its price has surged higher, there still wouldn't be many who think Shandong Sito Bio-technology's price-to-sales (or "P/S") ratio of 2.6x is worth a mention when the median P/S in China's Pharmaceuticals industry is similar at about 3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Shandong Sito Bio-technology

How Shandong Sito Bio-technology Has Been Performing

While the industry has experienced revenue growth lately, Shandong Sito Bio-technology's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Shandong Sito Bio-technology's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shandong Sito Bio-technology's Revenue Growth Trending?

Shandong Sito Bio-technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 13% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 24% during the coming year according to the only analyst following the company. That's shaping up to be materially lower than the 135% growth forecast for the broader industry.

With this information, we find it interesting that Shandong Sito Bio-technology is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Shandong Sito Bio-technology's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at the analysts forecasts of Shandong Sito Bio-technology's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shandong Sito Bio-technology that you should be aware of.

If these risks are making you reconsider your opinion on Shandong Sito Bio-technology, 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.