Risks Still Elevated At These Prices As Peijia Medical Limited (HKG:9996) Shares Dive 30%

Peijia Medical Limited (HKG:9996) shares have had a horrible month, losing 30% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 67% loss during that time.

Although its price has dipped substantially, when almost half of the companies in Hong Kong's Medical Equipment industry have price-to-sales ratios (or "P/S") below 2.6x, you may still consider Peijia Medical as a stock probably not worth researching with its 3.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Peijia Medical

How Peijia Medical Has Been Performing

With revenue growth that's superior to most other companies of late, Peijia Medical has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Peijia Medical will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Peijia Medical?

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

Retrospectively, the last year delivered an exceptional 76% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 27% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 44% per year, which is noticeably more attractive.

In light of this, it's alarming that Peijia Medical's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Peijia Medical's P/S Mean For Investors?

There's still some elevation in Peijia Medical's P/S, even if the same can't be said for its share price recently. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Peijia Medical, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Peijia Medical (2 are potentially serious!) that you need to be mindful 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.

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