When close to half the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3.8x, you may consider Shenzhen Chipscreen Biosciences Co., Ltd. (SHSE:688321) as a stock to avoid entirely with its 14.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Chipscreen Biosciences

How Shenzhen Chipscreen Biosciences Has Been Performing

With revenue growth that's inferior to most other companies of late, Shenzhen Chipscreen Biosciences has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Shenzhen Chipscreen Biosciences' Revenue Growth Trending?

Shenzhen Chipscreen Biosciences' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Pleasingly, revenue has also lifted 135% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 56% as estimated by the lone analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 40%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Shenzhen Chipscreen Biosciences' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Shenzhen Chipscreen Biosciences' P/S Mean For Investors?

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 look into Shenzhen Chipscreen Biosciences shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Chipscreen Biosciences, and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.