Revenues Not Telling The Story For GuangYuYuan Chinese Herbal Medicine Co., Ltd. (SHSE:600771)

When close to half the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 2.7x, you may consider GuangYuYuan Chinese Herbal Medicine Co., Ltd. (SHSE:600771) as a stock to avoid entirely with its 6.8x 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.

See our latest analysis for GuangYuYuan Chinese Herbal Medicine

How GuangYuYuan Chinese Herbal Medicine Has Been Performing

For instance, GuangYuYuan Chinese Herbal Medicine's receding revenue in recent times would have to be some food for thought. 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. 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 GuangYuYuan Chinese Herbal Medicine's earnings, revenue and cash flow.

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

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

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 7.0%. Regardless, revenue has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 149% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that GuangYuYuan Chinese Herbal Medicine 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.

The Key Takeaway

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.

Our examination of GuangYuYuan Chinese Herbal Medicine revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for GuangYuYuan Chinese Herbal Medicine you should be aware of.

If these risks are making you reconsider your opinion on GuangYuYuan Chinese Herbal Medicine, 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.