Jin Medical International Ltd. (NASDAQ:ZJYL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 44% and undoing the prior period's positive performance. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 327%.

Although its price has dipped substantially, Jin Medical International may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 17.9x, when you consider almost half of the companies in the Medical Equipment industry in the United States have P/S ratios under 3.3x and even P/S lower than 1.2x 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.

What Does Jin Medical International's P/S Mean For Shareholders?

It looks like revenue growth has deserted Jin Medical International recently, which is not something to boast about. One possibility is that the P/S is high because investors think the benign revenue growth will improve 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jin Medical International's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Jin Medical International?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Jin Medical International's to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Fortunately, a few good years before that means that it was still able to grow revenue by 9.1% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the industry, which is expected to grow by 9.3% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Jin Medical International is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Jin Medical International's P/S?

Even after such a strong price drop, Jin Medical International's P/S still exceeds the industry median significantly. 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.

Our examination of Jin Medical International revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Jin Medical International.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.