Wenzhou Kangning Hospital Co., Ltd. (HKG:2120) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 42%.

Although its price has surged higher, there still wouldn't be many who think Wenzhou Kangning Hospital's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S in Hong Kong's Healthcare industry is similar at about 0.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Wenzhou Kangning Hospital Has Been Performing

Wenzhou Kangning Hospital has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. Those who are bullish on Wenzhou Kangning Hospital will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

In order to justify its P/S ratio, Wenzhou Kangning Hospital would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 7.5% gain to the company's revenues. Pleasingly, revenue has also lifted 61% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

When compared to the industry's one-year growth forecast of 13%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it interesting that Wenzhou Kangning Hospital is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Wenzhou Kangning Hospital's P/S Mean For Investors?

Its shares have lifted substantially and now Wenzhou Kangning Hospital's P/S is back within range of 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.

To our surprise, Wenzhou Kangning Hospital revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Wenzhou Kangning Hospital (including 1 which makes us a bit uncomfortable).

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

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.

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