RemeGen Co., Ltd.'s (HKG:9995) 68% Price Boost Is Out Of Tune With Revenues

RemeGen Co., Ltd. (HKG:9995) shares have continued their recent momentum with a 68% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Although its price has surged higher, you could still be forgiven for feeling indifferent about RemeGen's P/S ratio of 9.8x, since the median price-to-sales (or "P/S") ratio for the Biotechs industry in Hong Kong is also close to 9.5x. 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.

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See our latest analysis for RemeGen

How RemeGen Has Been Performing

With revenue growth that's inferior to most other companies of late, RemeGen 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.

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Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 59% last year. The latest three year period has also seen a 21% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 35% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 48% per year, which is noticeably more attractive.

With this information, we find it interesting that RemeGen is trading at a fairly similar P/S compared to the industry. 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 Key Takeaway

RemeGen 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.

Given that RemeGen'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 is also worth noting that we have found 2 warning signs for RemeGen (1 is a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on RemeGen, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.