What Zhejiang Shengda Bio-Pharm Co., Ltd.'s (SHSE:603079) 27% Share Price Gain Is Not Telling You

Those holding Zhejiang Shengda Bio-Pharm Co., Ltd. (SHSE:603079) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, despite the strong performance over the last month, the full year gain of 6.3% isn't as attractive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Zhejiang Shengda Bio-Pharm's P/S ratio of 3.1x, since the median price-to-sales (or "P/S") ratio for the Pharmaceuticals industry in China is also close to 3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Zhejiang Shengda Bio-Pharm

What Does Zhejiang Shengda Bio-Pharm's Recent Performance Look Like?

Zhejiang Shengda Bio-Pharm has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. Those who are bullish on Zhejiang Shengda Bio-Pharm will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for Zhejiang Shengda Bio-Pharm, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Zhejiang Shengda Bio-Pharm's Revenue Growth Trending?

In order to justify its P/S ratio, Zhejiang Shengda Bio-Pharm would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 2.9% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 14% overall drop in revenue. 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 17% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Zhejiang Shengda Bio-Pharm's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does Zhejiang Shengda Bio-Pharm's P/S Mean For Investors?

Zhejiang Shengda Bio-Pharm appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We find it unexpected that Zhejiang Shengda Bio-Pharm trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Zhejiang Shengda Bio-Pharm that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.