Guangdong VTR Bio-Tech Co., Ltd. (SZSE:300381) shareholders have had their patience rewarded with a 41% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 10% is also fairly reasonable.

Even after such a large jump in price, Guangdong VTR Bio-Tech may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 4.7x, considering almost half of all companies in the Biotechs industry in China have P/S ratios greater than 7x and even P/S higher than 13x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Guangdong VTR Bio-Tech's Recent Performance Look Like?

We'd have to say that with no tangible growth over the last year, Guangdong VTR Bio-Tech's revenue has been unimpressive. Perhaps the market believes the recent lacklustre revenue performance is a sign of future underperformance relative to industry peers, hurting the P/S. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

How Is Guangdong VTR Bio-Tech's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Guangdong VTR Bio-Tech's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 57% decline in revenue over the last three years in total. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 230% shows it's an unpleasant look.

In light of this, it's understandable that Guangdong VTR Bio-Tech's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Guangdong VTR Bio-Tech's stock price has surged recently, but its but its P/S still remains modest. 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.

Our examination of Guangdong VTR Bio-Tech 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. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 4 warning signs for Guangdong VTR Bio-Tech (2 are potentially serious!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.