3D Medicines Inc. (HKG:1244) Soars 30% But It's A Story Of Risk Vs Reward

3D Medicines Inc. (HKG:1244) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 38% in the last twelve months.

Even after such a large jump in price, 3D Medicines' price-to-sales (or "P/S") ratio of 1.9x might still make it look like a strong buy right now compared to the wider Biotechs industry in Hong Kong, where around half of the companies have P/S ratios above 10.9x and even P/S above 29x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for 3D Medicines

How 3D Medicines Has Been Performing

For example, consider that 3D Medicines' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on 3D Medicines will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 3D Medicines' earnings, revenue and cash flow.

How Is 3D Medicines' Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like 3D Medicines' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. In spite of this, the company still managed to deliver immense revenue growth over the last three years. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 58% shows it's noticeably more attractive.

With this information, we find it odd that 3D Medicines is trading at a P/S lower than the industry. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On 3D Medicines' P/S

Shares in 3D Medicines have risen appreciably however, its P/S is still subdued. 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.

Our examination of 3D Medicines revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for 3D Medicines with six simple checks will allow you to discover any risks that could be an issue.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.