Revenues Not Telling The Story For Shanghai HeartCare Medical Technology Corporation Limited (HKG:6609) After Shares Rise 32%
Shanghai HeartCare Medical Technology Corporation Limited (HKG:6609) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 173% following the latest surge, making investors sit up and take notice.
Following the firm bounce in price, Shanghai HeartCare Medical Technology may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 6.1x, when you consider almost half of the companies in the Medical Equipment industry in Hong Kong have P/S ratios under 4.9x and even P/S lower than 1.6x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for Shanghai HeartCare Medical Technology
What Does Shanghai HeartCare Medical Technology's P/S Mean For Shareholders?
Recent times have been quite advantageous for Shanghai HeartCare Medical Technology as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Although there are no analyst estimates available for Shanghai HeartCare Medical Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Shanghai HeartCare Medical Technology's to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 33% last year. The strong recent performance means it was also able to grow revenue by 145% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 44% shows it's noticeably less attractive.
With this information, we find it concerning that Shanghai HeartCare Medical Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
What Does Shanghai HeartCare Medical Technology's P/S Mean For Investors?
Shanghai HeartCare Medical Technology's P/S is on the rise since its shares have risen strongly. 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 Shanghai HeartCare Medical Technology 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai HeartCare Medical Technology, and understanding should be part of your investment process.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.