The Guangdong VTR Bio-Tech Co., Ltd. (SZSE:300381) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 14% in that time.

Although its price has dipped substantially, Guangdong VTR Bio-Tech may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 3.9x, considering almost half of all companies in the Biotechs industry in China have P/S ratios greater than 6.8x and even P/S higher than 13x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Guangdong VTR Bio-Tech Has Been Performing

As an illustration, revenue has deteriorated at Guangdong VTR Bio-Tech over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

How Is Guangdong VTR Bio-Tech's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guangdong VTR Bio-Tech'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 13%. The last three years don't look nice either as the company has shrunk revenue by 57% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 270% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Guangdong VTR Bio-Tech's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

Guangdong VTR Bio-Tech's recently weak share price has pulled its P/S back below other Biotechs companies. 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.

As we suspected, our examination of Guangdong VTR Bio-Tech revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Guangdong VTR Bio-Tech (at least 3 which are a bit concerning), and understanding them should be part of your investment process.

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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