With a price-to-sales (or "P/S") ratio of 34.2x Suzhou Zelgen Biopharmaceuticals Co., Ltd. (SHSE:688266) may be sending very bearish signals at the moment, given that almost half of all the Biotechs companies in China have P/S ratios under 8.3x and even P/S lower than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Suzhou Zelgen Biopharmaceuticals

What Does Suzhou Zelgen Biopharmaceuticals' P/S Mean For Shareholders?

Recent times have been advantageous for Suzhou Zelgen Biopharmaceuticals as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Suzhou Zelgen Biopharmaceuticals would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 121% over the next year. That's shaping up to be materially lower than the 821% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Suzhou Zelgen Biopharmaceuticals' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Does Suzhou Zelgen Biopharmaceuticals' P/S Mean For Investors?

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.

It comes as a surprise to see Suzhou Zelgen Biopharmaceuticals trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Plus, you should also learn about these 2 warning signs we've spotted with Suzhou Zelgen Biopharmaceuticals.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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