Shanghai Kehua Bio-Engineering Co.,Ltd (SZSE:002022) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 32% share price drop.

Since its price has dipped substantially, Shanghai Kehua Bio-EngineeringLtd's price-to-sales (or "P/S") ratio of 1.2x might make it look like a strong buy right now compared to the wider Biotechs industry in China, where around half of the companies have P/S ratios above 7.1x and even P/S above 12x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for Shanghai Kehua Bio-EngineeringLtd

How Shanghai Kehua Bio-EngineeringLtd Has Been Performing

As an illustration, revenue has deteriorated at Shanghai Kehua Bio-EngineeringLtd over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Shanghai Kehua Bio-EngineeringLtd?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Shanghai Kehua Bio-EngineeringLtd's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 46%. Regardless, revenue has managed to lift by a handy 8.6% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 800% shows it's noticeably less attractive.

In light of this, it's understandable that Shanghai Kehua Bio-EngineeringLtd's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

Having almost fallen off a cliff, Shanghai Kehua Bio-EngineeringLtd's share price has pulled its P/S way down as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

In line with expectations, Shanghai Kehua Bio-EngineeringLtd maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shanghai Kehua Bio-EngineeringLtd 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.