Why We're Not Concerned About Jinhai Medical Technology Limited's (HKG:2225) Share Price

When you see that almost half of the companies in the Professional Services industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.4x, Jinhai Medical Technology Limited (HKG:2225) looks to be giving off strong sell signals with its 20x P/S ratio. 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.

View our latest analysis for Jinhai Medical Technology

What Does Jinhai Medical Technology's Recent Performance Look Like?

Jinhai Medical Technology certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Jinhai Medical Technology's earnings, revenue and cash flow.

How Is Jinhai Medical Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jinhai Medical Technology's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 205% last year. The latest three year period has also seen an excellent 226% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 10%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in consideration, it's not hard to understand why Jinhai Medical Technology's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's no surprise that Jinhai Medical Technology can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

Plus, you should also learn about these 2 warning signs we've spotted with Jinhai Medical Technology (including 1 which can't be ignored).

If you're unsure about the strength of Jinhai Medical Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.