InnoCare Pharma Limited (HKG:9969) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 149% following the latest surge, making investors sit up and take notice.
Since its price has surged higher, InnoCare Pharma may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 17.3x, when you consider almost half of the companies in the Biotechs industry in Hong Kong have P/S ratios under 9.5x and even P/S lower than 4x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Our free stock report includes 2 warning signs investors should be aware of before investing in InnoCare Pharma. Read for free now.Check out our latest analysis for InnoCare Pharma
How InnoCare Pharma Has Been Performing
Recent times haven't been great for InnoCare Pharma as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on InnoCare Pharma.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 InnoCare Pharma'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 37%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 3.2% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 33% per annum over the next three years. With the industry predicted to deliver 48% growth per year, the company is positioned for a weaker revenue result.
In light of this, it's alarming that InnoCare Pharma's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
What Does InnoCare Pharma's P/S Mean For Investors?
The strong share price surge has lead to InnoCare Pharma's P/S soaring as well. 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.
It comes as a surprise to see InnoCare Pharma trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for InnoCare Pharma that you should be aware of.
If these risks are making you reconsider your opinion on InnoCare Pharma, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.