Jiangsu Sihuan Bioengineering Co., Ltd (SZSE:000518) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 20% share price drop.

Although its price has dipped substantially, you could still be forgiven for thinking Jiangsu Sihuan Bioengineering is a stock not worth researching with a price-to-sales ratios (or "P/S") of 9.3x, considering almost half the companies in China's Biotechs industry have P/S ratios below 6.6x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Jiangsu Sihuan Bioengineering's Recent Performance Look Like?

For instance, Jiangsu Sihuan Bioengineering's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Jiangsu Sihuan Bioengineering's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 44% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 253% shows it's an unpleasant look.

With this information, we find it concerning that Jiangsu Sihuan Bioengineering is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Jiangsu Sihuan Bioengineering's P/S

There's still some elevation in Jiangsu Sihuan Bioengineering's P/S, even if the same can't be said for its share price recently. 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.

Our examination of Jiangsu Sihuan Bioengineering revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 1 warning sign for Jiangsu Sihuan Bioengineering you should be aware of.

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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