Pinning Down InnoCare Pharma Limited's (HKG:9969) P/S Is Difficult Right Now

With a median price-to-sales (or "P/S") ratio of close to 10.4x in the Biotechs industry in Hong Kong, you could be forgiven for feeling indifferent about InnoCare Pharma Limited's (HKG:9969) P/S ratio of 11.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for InnoCare Pharma

How InnoCare Pharma Has Been Performing

InnoCare Pharma could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on InnoCare Pharma.

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

In order to justify its P/S ratio, InnoCare Pharma would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered an exceptional 25% gain to the company's top line. Still, revenue has fallen 8.4% in total from three years ago, which is quite disappointing. 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 37% each year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 53% per annum, which is noticeably more attractive.

With this information, we find it interesting that InnoCare Pharma is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On InnoCare Pharma's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that InnoCare Pharma's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with InnoCare Pharma, and understanding should be part of your investment process.

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.