Unfortunately for some shareholders, the Obio Technology (Shanghai) Corp., Ltd. (SHSE:688238) share price has dived 26% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 67% share price decline.

Even after such a large drop in price, when almost half of the companies in China's Life Sciences industry have price-to-sales ratios (or "P/S") below 5.6x, you may still consider Obio Technology (Shanghai) as a stock not worth researching with its 15.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Obio Technology (Shanghai)'s P/S Mean For Shareholders?

Obio Technology (Shanghai) hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Obio Technology (Shanghai)?

In order to justify its P/S ratio, Obio Technology (Shanghai) would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line. Even so, admirably revenue has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 13% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 12% per year, which is not materially different.

In light of this, it's curious that Obio Technology (Shanghai)'s P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Obio Technology (Shanghai)'s P/S Mean For Investors?

Obio Technology (Shanghai)'s shares may have suffered, but its P/S remains high. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Analysts are forecasting Obio Technology (Shanghai)'s revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Obio Technology (Shanghai) with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Obio Technology (Shanghai)'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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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.