New Journey Health Technology Group Co.,LTD's (SZSE:002219) price-to-sales (or "P/S") ratio of 3.1x may not look like an appealing investment opportunity when you consider close to half the companies in the Healthcare industry in China have P/S ratios below 2.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for New Journey Health Technology GroupLTD

How New Journey Health Technology GroupLTD Has Been Performing

New Journey Health Technology GroupLTD has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For New Journey Health Technology GroupLTD?

There's an inherent assumption that a company should outperform the industry for P/S ratios like New Journey Health Technology GroupLTD's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.9% last year. The solid recent performance means it was also able to grow revenue by 13% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that New Journey Health Technology GroupLTD's P/S sits above the majority of other companies. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

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.

Our examination of New Journey Health Technology GroupLTD revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for New Journey Health Technology GroupLTD that you should be aware of.

If these risks are making you reconsider your opinion on New Journey Health Technology GroupLTD, 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.