What Venus Medtech (Hangzhou) Inc.'s (HKG:2500) P/S Is Not Telling You

There wouldn't be many who think Venus Medtech (Hangzhou) Inc.'s (HKG:2500) price-to-sales (or "P/S") ratio of 9.1x is worth a mention when the median P/S for the Medical Equipment industry in Hong Kong is similar at about 8.2x. 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 Venus Medtech (Hangzhou)

How Has Venus Medtech (Hangzhou) Performed Recently?

Venus Medtech (Hangzhou) 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 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 Venus Medtech (Hangzhou)'s future stacks up against the industry? In that case, our free report is a great place to start.

How Is Venus Medtech (Hangzhou)'s Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Venus Medtech (Hangzhou)'s is when the company's growth is tracking the industry closely.

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 2.3%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 74% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 47% per year during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 128% growth per year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Venus Medtech (Hangzhou)'s P/S is closely matching its industry peers. 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

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.

When you consider that Venus Medtech (Hangzhou)'s revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. 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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Venus Medtech (Hangzhou) with six simple checks will allow you to discover any risks that could be an issue.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.