Some Shareholders Feeling Restless Over Nanjing King-Friend Biochemical Pharmaceutical Co.,Ltd.'s (SHSE:603707) P/S Ratio

When you see that almost half of the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3.5x, Nanjing King-Friend Biochemical Pharmaceutical Co.,Ltd. (SHSE:603707) looks to be giving off strong sell signals with its 6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Nanjing King-Friend Biochemical PharmaceuticalLtd

What Does Nanjing King-Friend Biochemical PharmaceuticalLtd's Recent Performance Look Like?

Nanjing King-Friend Biochemical PharmaceuticalLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nanjing King-Friend Biochemical PharmaceuticalLtd.

How Is Nanjing King-Friend Biochemical PharmaceuticalLtd's Revenue Growth Trending?

Nanjing King-Friend Biochemical PharmaceuticalLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

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 3.2%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 9.6% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 34% during the coming year according to the nine analysts following the company. That's shaping up to be materially lower than the 61% growth forecast for the broader industry.

With this information, we find it concerning that Nanjing King-Friend Biochemical PharmaceuticalLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

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.

It comes as a surprise to see Nanjing King-Friend Biochemical PharmaceuticalLtd trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Nanjing King-Friend Biochemical PharmaceuticalLtd is showing 1 warning sign in our investment analysis, you should know about.

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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.