Yonghe Medical Group Co., Ltd. (HKG:2279) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. But the last month did very little to improve the 68% share price decline over the last year.

In spite of the firm bounce in price, Yonghe Medical Group may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.2x, considering almost half of all companies in the Healthcare industry in Hong Kong have P/S ratios greater than 1x and even P/S higher than 3x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Yonghe Medical Group Has Been Performing

Recent times have been advantageous for Yonghe Medical Group as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Yonghe Medical Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 12% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 28% as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 13% growth forecast for the broader industry.

With this information, we find it odd that Yonghe Medical Group is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Yonghe Medical Group's P/S?

Despite Yonghe Medical Group's share price climbing recently, its P/S still lags most other companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

To us, it seems Yonghe Medical Group currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Yonghe Medical Group (of which 1 is potentially serious!) you should know about.

If you're unsure about the strength of Yonghe Medical Group'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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