Why We're Not Concerned Yet About MicroPort CardioFlow Medtech Corporation's (HKG:2160) 26% Share Price Plunge

MicroPort CardioFlow Medtech Corporation (HKG:2160) shares have had a horrible month, losing 26% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 56%, which is great even in a bull market.

In spite of the heavy fall in price, MicroPort CardioFlow Medtech may still be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 6.7x, since almost half of all companies in the Medical Equipment in Hong Kong have P/S ratios under 5.5x and even P/S lower than 2x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for MicroPort CardioFlow Medtech

What Does MicroPort CardioFlow Medtech's P/S Mean For Shareholders?

MicroPort CardioFlow Medtech 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. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. 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 MicroPort CardioFlow Medtech.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like MicroPort CardioFlow Medtech's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.0%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 54% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 35% per annum during the coming three years according to the two analysts following the company. That's shaping up to be materially higher than the 23% per year growth forecast for the broader industry.

With this in mind, it's not hard to understand why MicroPort CardioFlow Medtech's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On MicroPort CardioFlow Medtech's P/S

MicroPort CardioFlow Medtech's P/S remain high even after its stock plunged. 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.

As we suspected, our examination of MicroPort CardioFlow Medtech's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for MicroPort CardioFlow Medtech that 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.