With a price-to-sales (or "P/S") ratio of 25.1x Ascentage Pharma Group International (HKG:6855) may be sending very bearish signals at the moment, given that almost half of all the Biotechs companies in Hong Kong have P/S ratios under 8.7x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
SEHK:6855 Price to Sales Ratio vs Industry February 17th 2024
What Does Ascentage Pharma Group International's P/S Mean For Shareholders?
With revenue growth that's inferior to most other companies of late, Ascentage Pharma Group International has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Ascentage Pharma Group International's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Revenue Growth Metrics Telling Us About The High P/S?
The only time you'd be truly comfortable seeing a P/S as steep as Ascentage Pharma Group International's is when the company's growth is on track to outshine the industry decidedly.
If we review the last year of revenue growth, the company posted a terrific increase of 132%. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 55% per year as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 64% each year growth forecast for the broader industry.
With this information, we find it concerning that Ascentage Pharma Group International is trading at a P/S higher than the industry. 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 Bottom Line On Ascentage Pharma Group International's P/S
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've concluded that Ascentage Pharma Group International currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Ascentage Pharma Group International that you need to be mindful of.
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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