Shanghai HeartCare Medical Technology Corporation Limited's (HKG:6609) 32% Share Price Surge Not Quite Adding Up

The Shanghai HeartCare Medical Technology Corporation Limited (HKG:6609) share price has done very well over the last month, posting an excellent gain of 32%. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Shanghai HeartCare Medical Technology's price-to-sales (or "P/S") ratio of 3.9x is worth a mention when the median P/S in Hong Kong's Medical Equipment industry is similar at about 3.3x. 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.

See our latest analysis for Shanghai HeartCare Medical Technology

How Has Shanghai HeartCare Medical Technology Performed Recently?

With revenue growth that's inferior to most other companies of late, Shanghai HeartCare Medical Technology has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little 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 Shanghai HeartCare Medical Technology.

Do Revenue Forecasts Match The P/S Ratio?

Shanghai HeartCare Medical 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.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 36% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 46% growth forecast for the broader industry.

In light of this, it's curious that Shanghai HeartCare Medical Technology's P/S sits in line with the majority of other companies. 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 Final Word

Shanghai HeartCare Medical Technology appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that Shanghai HeartCare Medical Technology'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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shanghai HeartCare Medical Technology with six simple checks will allow you to discover any risks that could be an issue.

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).

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.