Pinning Down InnoCare Pharma Limited’s (HKG:9969) P/S Is Difficult Right Now

There wouldn’t be many who think InnoCare Pharma Limited’s (HKG:9969) price-to-sales (or “P/S”) ratio of 12.5x is worth a mention when the median P/S for the Biotechs industry in Hong Kong is similar at about 14.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for InnoCare Pharma

What Does InnoCare Pharma’s Recent Performance Look Like?

InnoCare Pharma could be doing better as it’s been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. 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 InnoCare Pharma’s future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For InnoCare Pharma?

InnoCare Pharma’s P/S ratio would be typical for a company that’s only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 59% last year. The latest three year period has also seen an excellent 184% overall rise in revenue, aided by its 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 31% per annum as estimated by the eleven analysts watching the company. That’s shaping up to be materially lower than the 90% per annum growth forecast for the broader industry.

With this in mind, we find it intriguing that InnoCare Pharma’s P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From InnoCare Pharma’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.

When you consider that InnoCare Pharma’s revenue growth estimates are fairly muted compared to the broader industry, it’s easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.

We don’t want to rain on the parade too much, but we did also find 1 warning sign for InnoCare Pharma that you need to be mindful 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.