Shanghai Shen Lian Biomedical Corporation's (SHSE:688098) Shares Climb 44% But Its Business Is Yet to Catch Up

The Shanghai Shen Lian Biomedical Corporation (SHSE:688098) share price has done very well over the last month, posting an excellent gain of 44%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.

Since its price has surged higher, you could be forgiven for thinking Shanghai Shen Lian Biomedical is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.4x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shanghai Shen Lian Biomedical

How Has Shanghai Shen Lian Biomedical Performed Recently?

For instance, Shanghai Shen Lian Biomedical's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Shanghai Shen Lian Biomedical's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai Shen Lian Biomedical?

Shanghai Shen Lian Biomedical'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 2.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 9.3% in total over the last three years. 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 141% 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 Shanghai Shen Lian Biomedical's P/S exceeds that of its industry peers. 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.

What Does Shanghai Shen Lian Biomedical's P/S Mean For Investors?

The strong share price surge has lead to Shanghai Shen Lian Biomedical's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shanghai Shen Lian Biomedical revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Shanghai Shen Lian Biomedical has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Shanghai Shen Lian Biomedical, 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.