Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) Shares Fly 27% But Investors Aren't Buying For Growth

Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. But the last month did very little to improve the 57% share price decline over the last year.

Although its price has surged higher, Shanghai Junshi Biosciences' price-to-sales (or "P/S") ratio of 6.9x might still make it look like a buy right now compared to the Biotechs industry in Hong Kong, where around half of the companies have P/S ratios above 11.9x and even P/S above 26x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Shanghai Junshi Biosciences

How Has Shanghai Junshi Biosciences Performed Recently?

Recent times haven't been great for Shanghai Junshi Biosciences as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Shanghai Junshi Biosciences' future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shanghai Junshi Biosciences' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 51% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 46% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 31% per annum during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 125% per year growth forecast for the broader industry.

With this in consideration, its clear as to why Shanghai Junshi Biosciences' P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift Shanghai Junshi Biosciences' P/S close to the industry median. 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.

We've established that Shanghai Junshi Biosciences maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Shanghai Junshi Biosciences that you need to take into consideration.

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.