Despite an already strong run, Shanghai Xuerong Biotechnology Co.,Ltd. (SZSE:300511) shares have been powering on, with a gain of 36% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Even after such a large jump in price, Shanghai Xuerong BiotechnologyLtd may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.9x, since almost half of all companies in the Food industry in China have P/S ratios greater than 1.7x and even P/S higher than 4x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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

For example, consider that Shanghai Xuerong BiotechnologyLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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.

Is There Any Revenue Growth Forecasted For Shanghai Xuerong BiotechnologyLtd?

The only time you'd be truly comfortable seeing a P/S as low as Shanghai Xuerong BiotechnologyLtd's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 5.9% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

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.

The Final Word

Despite Shanghai Xuerong BiotechnologyLtd's share price climbing recently, its P/S still lags most other companies. 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.

In line with expectations, Shanghai Xuerong BiotechnologyLtd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Shanghai Xuerong BiotechnologyLtd that you should be aware of.

If you're unsure about the strength of Shanghai Xuerong BiotechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.