Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 59% in the last year.

After such a large jump in price, you could be forgiven for thinking Sunshine Guojian Pharmaceutical (Shanghai) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14.8x, considering almost half the companies in China's Biotechs industry have P/S ratios below 7.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Sunshine Guojian Pharmaceutical (Shanghai)

How Has Sunshine Guojian Pharmaceutical (Shanghai) Performed Recently?

With revenue growth that's superior to most other companies of late, Sunshine Guojian Pharmaceutical (Shanghai) has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Sunshine Guojian Pharmaceutical (Shanghai) will help you uncover what's on the horizon.

How Is Sunshine Guojian Pharmaceutical (Shanghai)'s Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Sunshine Guojian Pharmaceutical (Shanghai)'s is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. The latest three year period has also seen an excellent 55% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 8.0% as estimated by the only analyst watching the company. With the industry predicted to deliver 163% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Sunshine Guojian Pharmaceutical (Shanghai)'s P/S is outpacing its industry peers. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Shares in Sunshine Guojian Pharmaceutical (Shanghai) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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've concluded that Sunshine Guojian Pharmaceutical (Shanghai) currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Sunshine Guojian Pharmaceutical (Shanghai) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.