Revenues Not Telling The Story For Shanghai Fudan Forward S&T Co., Ltd (SHSE:600624) After Shares Rise 27%

Despite an already strong run, Shanghai Fudan Forward S&T Co., Ltd (SHSE:600624) shares have been powering on, with a gain of 27% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, you could be forgiven for thinking Shanghai Fudan Forward S&T is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.5x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.5x. 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 Shanghai Fudan Forward S&T

How Has Shanghai Fudan Forward S&T Performed Recently?

For example, consider that Shanghai Fudan Forward S&T's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Fudan Forward S&T will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Shanghai Fudan Forward S&T?

The only time you'd be truly comfortable seeing a P/S as steep as Shanghai Fudan Forward S&T's is when the company's growth is on track to outshine the industry decidedly.

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 13%. This means it has also seen a slide in revenue over the longer-term as revenue is down 36% 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 208% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Shanghai Fudan Forward S&T'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. 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 We Can Learn From Shanghai Fudan Forward S&T's P/S?

The strong share price surge has lead to Shanghai Fudan Forward S&T's P/S soaring as well. 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.

We've established that Shanghai Fudan Forward S&T 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. 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.

Before you take the next step, you should know about the 2 warning signs for Shanghai Fudan Forward S&T (1 can't be ignored!) that we have uncovered.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.