Kangmei Pharmaceutical Co., Ltd.'s (SHSE:600518) Price Is Out Of Tune With Revenues

When close to half the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3.4x, you may consider Kangmei Pharmaceutical Co., Ltd. (SHSE:600518) as a stock to avoid entirely with its 5.6x P/S ratio. 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 Kangmei Pharmaceutical

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

Kangmei Pharmaceutical certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in 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 Kangmei Pharmaceutical's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Kangmei Pharmaceutical?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kangmei Pharmaceutical's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. Still, revenue has fallen 1.5% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 43% shows it's an unpleasant look.

With this information, we find it concerning that Kangmei Pharmaceutical is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Kangmei Pharmaceutical's P/S Mean For Investors?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Kangmei Pharmaceutical currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Kangmei Pharmaceutical that you should be aware of.

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