Shaanxi Kanghui Pharmaceutical Co., Ltd. (SHSE:603139) Stock Rockets 43% As Investors Are Less Pessimistic Than Expected

Shaanxi Kanghui Pharmaceutical Co., Ltd. (SHSE:603139) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 35%.

Although its price has surged higher, it's still not a stretch to say that Shaanxi Kanghui Pharmaceutical's price-to-sales (or "P/S") ratio of 3.4x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in China, where the median P/S ratio is around 3.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Shaanxi Kanghui Pharmaceutical

How Shaanxi Kanghui Pharmaceutical Has Been Performing

The recent revenue growth at Shaanxi Kanghui Pharmaceutical would have to be considered satisfactory if not spectacular. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Shaanxi Kanghui Pharmaceutical will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shaanxi Kanghui Pharmaceutical will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

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

If we review the last year of revenue growth, the company posted a worthy increase of 2.8%. Pleasingly, revenue has also lifted 33% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 64% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that Shaanxi Kanghui Pharmaceutical's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Shaanxi Kanghui Pharmaceutical's P/S?

Shaanxi Kanghui Pharmaceutical appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shaanxi Kanghui Pharmaceutical's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Before you settle on your opinion, we've discovered 2 warning signs for Shaanxi Kanghui Pharmaceutical that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.