Jin Medical International Ltd.'s (NASDAQ:ZJYL) 27% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Jin Medical International Ltd. (NASDAQ:ZJYL) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 366%.

Even after such a large drop in price, Jin Medical International's price-to-sales (or "P/S") ratio of 16x might still make it look like a strong sell right now compared to other companies in the Medical Equipment industry in the United States, where around half of the companies have P/S ratios below 3.4x and even P/S below 1.2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Jin Medical International

How Jin Medical International Has Been Performing

It looks like revenue growth has deserted Jin Medical International recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jin Medical International will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Jin Medical International?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow revenue by 9.1% in total over the last three years. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 9.4% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Jin Medical International's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

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

A significant share price dive has done very little to deflate Jin Medical International's very lofty P/S. 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.

The fact that Jin Medical International currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Jin Medical International that you should be aware of.

If these risks are making you reconsider your opinion on Jin Medical International, 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.