Shanghai Fudan Forward S&T Co., Ltd's (SHSE:600624) 34% Price Boost Is Out Of Tune With Revenues

Shanghai Fudan Forward S&T Co., Ltd (SHSE:600624) shares have had a really impressive month, gaining 34% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

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 8.3x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.4x. 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

What Does Shanghai Fudan Forward S&T's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Shanghai Fudan Forward S&T over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Shanghai Fudan Forward S&T's earnings, revenue and cash flow.

How Is Shanghai Fudan Forward S&T's Revenue Growth Trending?

In order to justify its P/S ratio, Shanghai Fudan Forward S&T would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune 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.

In contrast to the company, the rest of the industry is expected to grow by 99% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Shanghai Fudan Forward S&T 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. 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.

The Key Takeaway

Shanghai Fudan Forward S&T's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Shanghai Fudan Forward S&T revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shanghai Fudan Forward S&T you should be aware of.

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.