Unpleasant Surprises Could Be In Store For Jiangsu Aidea Pharmaceutical Co., Ltd.'s (SHSE:688488) Shares

Simply Wall St · 10/16 00:58

When close to half the companies in the Biotechs industry in China have price-to-sales ratios (or "P/S") below 6.5x, you may consider Jiangsu Aidea Pharmaceutical Co., Ltd. (SHSE:688488) as a stock to avoid entirely with its 10.1x P/S ratio. 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 Jiangsu Aidea Pharmaceutical

ps-multiple-vs-industry
SHSE:688488 Price to Sales Ratio vs Industry October 16th 2024

What Does Jiangsu Aidea Pharmaceutical's Recent Performance Look Like?

Jiangsu Aidea Pharmaceutical could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

Jiangsu Aidea Pharmaceutical's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 11% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 90% as estimated by the dual analysts watching the company. With the industry predicted to deliver 216% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Jiangsu Aidea Pharmaceutical's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Jiangsu Aidea Pharmaceutical's P/S?

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.

It comes as a surprise to see Jiangsu Aidea Pharmaceutical trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Jiangsu Aidea Pharmaceutical has 2 warning signs we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).