To the annoyance of some shareholders, Chengdu Olymvax Biopharmaceuticals Inc. (SHSE:688319) shares are down a considerable 30% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 66% loss during that time.

Although its price has dipped substantially, it's still not a stretch to say that Chengdu Olymvax Biopharmaceuticals' price-to-sales (or "P/S") ratio of 5.9x right now seems quite "middle-of-the-road" compared to the Biotechs industry in China, where the median P/S ratio is around 6.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

How Chengdu Olymvax Biopharmaceuticals Has Been Performing

While the industry has experienced revenue growth lately, Chengdu Olymvax Biopharmaceuticals' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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How Is Chengdu Olymvax Biopharmaceuticals' Revenue Growth Trending?

In order to justify its P/S ratio, Chengdu Olymvax Biopharmaceuticals would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.4%. Even so, admirably revenue has lifted 55% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 70% during the coming year according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 175%, which is noticeably more attractive.

In light of this, it's curious that Chengdu Olymvax Biopharmaceuticals' P/S sits in line with the majority of other companies. 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.

The Final Word

Chengdu Olymvax Biopharmaceuticals' plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Chengdu Olymvax Biopharmaceuticals' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Chengdu Olymvax Biopharmaceuticals with six simple checks on some of these key factors.

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.