Despite an already strong run, Shanghai Labway Clinical Laboratory Co., Ltd (SZSE:301060) shares have been powering on, with a gain of 50% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, given close to half the companies operating in China's Healthcare industry have price-to-sales ratios (or "P/S") below 1.8x, you may consider Shanghai Labway Clinical Laboratory as a stock to potentially avoid with its 2.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Shanghai Labway Clinical Laboratory's Recent Performance Look Like?

For instance, Shanghai Labway Clinical Laboratory's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Shanghai Labway Clinical Laboratory's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Shanghai Labway Clinical Laboratory's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% 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 that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Shanghai Labway Clinical Laboratory is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Final Word

Shanghai Labway Clinical Laboratory's P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Shanghai Labway Clinical Laboratory 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanghai Labway Clinical Laboratory that you should be aware of.

If you're unsure about the strength of Shanghai Labway Clinical Laboratory'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.