Insufficient Growth At Shaanxi Kanghui Pharmaceutical Co., Ltd. (SHSE:603139) Hampers Share Price

With a price-to-sales (or "P/S") ratio of 1.9x Shaanxi Kanghui Pharmaceutical Co., Ltd. (SHSE:603139) may be sending bullish signals at the moment, given that almost half of all the Pharmaceuticals companies in China have P/S ratios greater than 3.2x and even P/S higher than 7x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shaanxi Kanghui Pharmaceutical

What Does Shaanxi Kanghui Pharmaceutical's Recent Performance Look Like?

The revenue growth achieved at Shaanxi Kanghui Pharmaceutical over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shaanxi Kanghui Pharmaceutical's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 29% last year. The strong recent performance means it was also able to grow revenue by 48% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 134% shows it's noticeably less attractive.

In light of this, it's understandable that Shaanxi Kanghui Pharmaceutical's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Shaanxi Kanghui Pharmaceutical confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shaanxi Kanghui Pharmaceutical you should know about.

If these risks are making you reconsider your opinion on Shaanxi Kanghui Pharmaceutical, 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.