MicroTech Medical (Hangzhou) Co., Ltd. (HKG:2235) Stocks Shoot Up 26% But Its P/S Still Looks Reasonable

MicroTech Medical (Hangzhou) Co., Ltd. (HKG:2235) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

Since its price has surged higher, MicroTech Medical (Hangzhou) may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 6.9x, when you consider almost half of the companies in the Medical Equipment industry in Hong Kong have P/S ratios under 3.6x and even P/S lower than 1.3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for MicroTech Medical (Hangzhou)

How MicroTech Medical (Hangzhou) Has Been Performing

MicroTech Medical (Hangzhou) certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is MicroTech Medical (Hangzhou)'s Revenue Growth Trending?

MicroTech Medical (Hangzhou)'s P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 36%. Pleasingly, revenue has also lifted 128% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 33% each year over the next three years. With the industry only predicted to deliver 16% each year, the company is positioned for a stronger revenue result.

With this information, we can see why MicroTech Medical (Hangzhou) is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

MicroTech Medical (Hangzhou)'s P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into MicroTech Medical (Hangzhou) shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for MicroTech Medical (Hangzhou) with six simple checks will allow you to discover any risks that could be an issue.

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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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.