There's Reason For Concern Over Qinghai Spring Medicinal Resources Technology Co., Ltd.'s (SHSE:600381) Massive 30% Price Jump

Qinghai Spring Medicinal Resources Technology Co., Ltd. (SHSE:600381) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. But the last month did very little to improve the 58% share price decline over the last year.

Following the firm bounce in price, 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 7.8x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Qinghai Spring Medicinal Resources Technology

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

With revenue growth that's exceedingly strong of late, Qinghai Spring Medicinal Resources Technology has been doing very well. 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.

Although there are no analyst estimates available for Qinghai Spring Medicinal Resources Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Qinghai Spring Medicinal Resources Technology would need to produce outstanding growth that's well in excess of the industry.

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. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 217% shows it's noticeably less attractive.

With this in mind, we find it worrying that Qinghai Spring Medicinal Resources Technology's P/S exceeds that of its industry peers. 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 We Can Learn From Qinghai Spring Medicinal Resources Technology's P/S?

The strong share price surge has lead to Qinghai Spring Medicinal Resources Technology's P/S soaring as well. 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.

The fact that Qinghai Spring Medicinal Resources Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You should always think about risks. Case in point, we've spotted 1 warning sign for Qinghai Spring Medicinal Resources Technology you should be aware of.

If these risks are making you reconsider your opinion on Qinghai Spring Medicinal Resources Technology, 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.