Those holding Shanghai Xuerong Biotechnology Co.,Ltd. (SZSE:300511) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 41% over that time.

Although its price has surged higher, Shanghai Xuerong BiotechnologyLtd's price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Food industry in China, where around half of the companies have P/S ratios above 1.8x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Shanghai Xuerong BiotechnologyLtd's P/S Mean For Shareholders?

Revenue has risen firmly for Shanghai Xuerong BiotechnologyLtd recently, which is pleasing to see. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. Those who are bullish on Shanghai Xuerong BiotechnologyLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Shanghai Xuerong BiotechnologyLtd's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shanghai Xuerong BiotechnologyLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. The solid recent performance means it was also able to grow revenue by 18% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.

With this information, we can see why Shanghai Xuerong BiotechnologyLtd is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Shanghai Xuerong BiotechnologyLtd's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Shanghai Xuerong BiotechnologyLtd's P/S close to the industry median. 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.

As we suspected, our examination of Shanghai Xuerong BiotechnologyLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Shanghai Xuerong BiotechnologyLtd.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.