Changjiang Pharmaceutical Group Co., Ltd.'s (SZSE:300391) Shares Climb 53% But Its Business Is Yet to Catch Up

Changjiang Pharmaceutical Group Co., Ltd. (SZSE:300391) shares have continued their recent momentum with a 53% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.4% over the last year.

Following the firm bounce in price, given around half the companies in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Changjiang Pharmaceutical Group as a stock to avoid entirely with its 9.5x 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.

See our latest analysis for Changjiang Pharmaceutical Group

What Does Changjiang Pharmaceutical Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Changjiang Pharmaceutical Group over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Changjiang Pharmaceutical Group's earnings, revenue and cash flow.

How Is Changjiang Pharmaceutical Group's Revenue Growth Trending?

Changjiang Pharmaceutical Group'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.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 77%. This means it has also seen a slide in revenue over the longer-term as revenue is down 88% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Changjiang Pharmaceutical Group is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Does Changjiang Pharmaceutical Group's P/S Mean For Investors?

The strong share price surge has lead to Changjiang Pharmaceutical Group's P/S soaring as well. 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.

We've established that Changjiang Pharmaceutical Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Changjiang Pharmaceutical Group, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Changjiang Pharmaceutical Group, 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.