When you see that almost half of the companies in the Biotechs industry in China have price-to-sales ratios (or "P/S") below 7x, Chengdu Olymvax Biopharmaceuticals Inc. (SHSE:688319) looks to be giving off some sell signals with its 8.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Chengdu Olymvax Biopharmaceuticals' Recent Performance Look Like?

Chengdu Olymvax Biopharmaceuticals 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Chengdu Olymvax Biopharmaceuticals' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 30% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 36% as estimated by the two analysts watching the company. With the industry predicted to deliver 230% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Chengdu Olymvax Biopharmaceuticals' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Chengdu Olymvax Biopharmaceuticals, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

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

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.