Tianjin TEDA Biomedical Engineering Company Limited (HKG:8189) shares have continued their recent momentum with a 59% gain in the last month alone. The last month tops off a massive increase of 248% in the last year.

Since its price has surged higher, when almost half of the companies in Hong Kong's Chemicals industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Tianjin TEDA Biomedical Engineering as a stock probably not worth researching with its 1.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Tianjin TEDA Biomedical Engineering's P/S Mean For Shareholders?

The revenue growth achieved at Tianjin TEDA Biomedical Engineering over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Tianjin TEDA Biomedical Engineering's to be considered reasonable.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 5.0% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 5.5% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Tianjin TEDA Biomedical Engineering's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Tianjin TEDA Biomedical Engineering's P/S Mean For Investors?

Tianjin TEDA Biomedical Engineering's P/S is on the rise since its shares have risen strongly. 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.

We've established that Tianjin TEDA Biomedical Engineering currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Tianjin TEDA Biomedical Engineering (1 doesn't sit too well with us) you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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