There's Reason For Concern Over Shandong Sito Bio-technology Co., Ltd.'s (SZSE:300583) Massive 26% Price Jump

Despite an already strong run, Shandong Sito Bio-technology Co., Ltd. (SZSE:300583) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Following the firm bounce in price, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.6x, you may consider Shandong Sito Bio-technology as a stock probably not worth researching with its 4.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Shandong Sito Bio-technology

How Has Shandong Sito Bio-technology Performed Recently?

Shandong Sito Bio-technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shandong Sito Bio-technology.

Is There Enough Revenue Growth Forecasted For Shandong Sito Bio-technology?

Shandong Sito Bio-technology's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 34% over the next year. With the industry predicted to deliver 222% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Shandong Sito Bio-technology's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Shandong Sito Bio-technology's shares has lifted the company's P/S handsomely. 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.

It comes as a surprise to see Shandong Sito Bio-technology trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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.

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.