AIM Vaccine Co., Ltd. (HKG:6660) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 91% share price decline.

After such a large drop in price, AIM Vaccine's price-to-sales (or "P/S") ratio of 4.2x might make it look like a strong buy right now compared to the wider Biotechs industry in Hong Kong, where around half of the companies have P/S ratios above 8.7x and even P/S above 19x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

What Does AIM Vaccine's P/S Mean For Shareholders?

For instance, AIM Vaccine's receding revenue in recent times would have to be some food for thought. 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.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, AIM Vaccine would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 6.1% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 28% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we are not surprised that AIM Vaccine is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

AIM Vaccine's P/S looks about as weak as its stock price lately. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It's no surprise that AIM Vaccine maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for AIM Vaccine that 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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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.