Peijia Medical Limited (HKG:9996) shares have had a horrible month, losing 29% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 55% loss during that time.

Even after such a large drop in price, Peijia Medical may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 8.4x, since almost half of all companies in the Medical Equipment industry in Hong Kong have P/S ratios under 4x and even P/S lower than 1.7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Peijia Medical

What Does Peijia Medical's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Peijia Medical has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

The only time you'd be truly comfortable seeing a P/S as steep as Peijia Medical's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 75% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 56% per annum during the coming three years according to the four analysts following the company. With the industry predicted to deliver 90% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Peijia Medical's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

A significant share price dive has done very little to deflate Peijia Medical's very lofty P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It comes as a surprise to see Peijia Medical trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Peijia Medical that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.