What Hangzhou TianMuShan Pharmaceutical Enterprise Co.,Ltd's (SHSE:600671) 27% Share Price Gain Is Not Telling You

Hangzhou TianMuShan Pharmaceutical Enterprise Co.,Ltd (SHSE:600671) shares have continued their recent momentum with a 27% 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 18% over that time.

Following the firm bounce in price, given around half the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Hangzhou TianMuShan Pharmaceutical EnterpriseLtd as a stock to avoid entirely with its 7.9x P/S ratio. 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.

View our latest analysis for Hangzhou TianMuShan Pharmaceutical EnterpriseLtd

How Hangzhou TianMuShan Pharmaceutical EnterpriseLtd Has Been Performing

The revenue growth achieved at Hangzhou TianMuShan Pharmaceutical EnterpriseLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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 may 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 Hangzhou TianMuShan Pharmaceutical EnterpriseLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hangzhou TianMuShan Pharmaceutical EnterpriseLtd?

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

If we review the last year of revenue growth, the company posted a terrific increase of 21%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 24% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 153% shows it's an unpleasant look.

With this information, we find it concerning that Hangzhou TianMuShan Pharmaceutical EnterpriseLtd is trading at a P/S higher than the industry. 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 Hangzhou TianMuShan Pharmaceutical EnterpriseLtd's P/S?

The strong share price surge has lead to Hangzhou TianMuShan Pharmaceutical EnterpriseLtd's P/S soaring as well. 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.

We've established that Hangzhou TianMuShan Pharmaceutical EnterpriseLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hangzhou TianMuShan Pharmaceutical EnterpriseLtd you should be aware of.

If these risks are making you reconsider your opinion on Hangzhou TianMuShan Pharmaceutical EnterpriseLtd, 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.