Optimistic Investors Push Qinghai Spring Medicinal Resources Technology Co., Ltd. (SHSE:600381) Shares Up 25% But Growth Is Lacking

Qinghai Spring Medicinal Resources Technology Co., Ltd. (SHSE:600381) shares have continued their recent momentum with a 25% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

Since its price has surged higher, you could be forgiven for thinking Qinghai Spring Medicinal Resources Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.2x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Qinghai Spring Medicinal Resources Technology

What Does Qinghai Spring Medicinal Resources Technology's P/S Mean For Shareholders?

Qinghai Spring Medicinal Resources Technology certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little 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 Qinghai Spring Medicinal Resources Technology's earnings, revenue and cash flow.

How Is Qinghai Spring Medicinal Resources Technology's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Qinghai Spring Medicinal Resources Technology's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 31%. The strong recent performance means it was also able to grow revenue by 75% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 187% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Qinghai Spring Medicinal Resources Technology's P/S sits above the majority of other companies. 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 Qinghai Spring Medicinal Resources Technology's P/S?

Shares in Qinghai Spring Medicinal Resources Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Qinghai Spring Medicinal Resources Technology 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Qinghai Spring Medicinal Resources Technology that you should be aware of.

If you're unsure about the strength of Qinghai Spring Medicinal Resources Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.