Zhejiang Hisun Pharmaceutical Co., Ltd.'s (SHSE:600267) Shares Lagging The Industry But So Is The Business

With a price-to-sales (or "P/S") ratio of 0.9x Zhejiang Hisun Pharmaceutical Co., Ltd. (SHSE:600267) may be sending bullish signals at the moment, given that almost half of all the Pharmaceuticals companies in China have P/S ratios greater than 2.9x and even P/S higher than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Zhejiang Hisun Pharmaceutical

How Has Zhejiang Hisun Pharmaceutical Performed Recently?

Zhejiang Hisun Pharmaceutical could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Zhejiang Hisun Pharmaceutical will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

Zhejiang Hisun Pharmaceutical's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 21% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue growth is heading into negative territory, declining 0.2% over the next year. Meanwhile, the broader industry is forecast to expand by 139%, which paints a poor picture.

With this in consideration, we find it intriguing that Zhejiang Hisun Pharmaceutical's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Zhejiang Hisun Pharmaceutical's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Zhejiang Hisun Pharmaceutical is showing 1 warning sign in our investment analysis, you should know about.

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.