Shanghai Kinetic Medical Co., Ltd (SZSE:300326) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 37% share price drop.

After such a large drop in price, Shanghai Kinetic Medical may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3.5x, since almost half of all companies in the Medical Equipment industry in China have P/S ratios greater than 5x and even P/S higher than 9x 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.

How Has Shanghai Kinetic Medical Performed Recently?

As an illustration, revenue has deteriorated at Shanghai Kinetic Medical over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Shanghai Kinetic Medical?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. As a result, revenue from three years ago have also fallen 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Shanghai Kinetic Medical's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Shanghai Kinetic Medical's P/S Mean For Investors?

Shanghai Kinetic Medical's P/S has taken a dip along with its share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shanghai Kinetic Medical confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Before you take the next step, you should know about the 2 warning signs for Shanghai Kinetic Medical that we have uncovered.

If these risks are making you reconsider your opinion on Shanghai Kinetic Medical, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.