When close to half the companies in the Pharmaceuticals industry in Hong Kong have price-to-sales ratios (or "P/S") below 1.5x, you may consider Hua Medicine (Shanghai) Ltd. (HKG:2552) as a stock to avoid entirely with its 8.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for Hua Medicine (Shanghai)
How Has Hua Medicine (Shanghai) Performed Recently?
Recent times have been quite advantageous for Hua Medicine (Shanghai) as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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 Hua Medicine (Shanghai)'s earnings, revenue and cash flow.Is There Enough Revenue Growth Forecasted For Hua Medicine (Shanghai)?
Hua Medicine (Shanghai)'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.
Retrospectively, the last year delivered an exceptional 234% gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 11% shows it's noticeably less attractive.
With this in mind, we find it worrying that Hua Medicine (Shanghai)'s P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.
The Final Word
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 examination of Hua Medicine (Shanghai) 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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 Hua Medicine (Shanghai) (including 1 which is a bit concerning).
If these risks are making you reconsider your opinion on Hua Medicine (Shanghai), explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.