Pinning Down Shanghai Universal Biotech Co.,Ltd.'s (SZSE:301166) P/S Is Difficult Right Now

Simply Wall St · 10/15 23:11

With a median price-to-sales (or "P/S") ratio of close to 1.6x in the Healthcare industry in China, you could be forgiven for feeling indifferent about Shanghai Universal Biotech Co.,Ltd.'s (SZSE:301166) P/S ratio of 2.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Shanghai Universal BiotechLtd

ps-multiple-vs-industry
SZSE:301166 Price to Sales Ratio vs Industry October 15th 2024

What Does Shanghai Universal BiotechLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Shanghai Universal BiotechLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Shanghai Universal BiotechLtd's earnings, revenue and cash flow.

How Is Shanghai Universal BiotechLtd's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shanghai Universal BiotechLtd's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 18% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Shanghai Universal BiotechLtd's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

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 Universal BiotechLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Shanghai Universal BiotechLtd (2 are concerning!) that you should be aware of before investing here.

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