Shanghai MicuRx Pharmaceutical Co., Ltd.'s (SHSE:688373) 26% Share Price Surge Not Quite Adding Up

Shanghai MicuRx Pharmaceutical Co., Ltd. (SHSE:688373) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 43% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in China's Biotechs industry have price-to-sales ratios (or "P/S") below 7.1x, you may consider Shanghai MicuRx Pharmaceutical as a stock not worth researching with its 40x P/S ratio. 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.

See our latest analysis for Shanghai MicuRx Pharmaceutical

How Shanghai MicuRx Pharmaceutical Has Been Performing

With revenue growth that's superior to most other companies of late, Shanghai MicuRx Pharmaceutical has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Shanghai MicuRx Pharmaceutical's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Shanghai MicuRx Pharmaceutical?

In order to justify its P/S ratio, Shanghai MicuRx Pharmaceutical would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 88% gain to the company's top line. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 61% per year during the coming three years according to the one analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 202% each year, which is noticeably more attractive.

With this information, we find it concerning that Shanghai MicuRx Pharmaceutical 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

The strong share price surge has lead to Shanghai MicuRx Pharmaceutical'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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Shanghai MicuRx Pharmaceutical, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shanghai MicuRx Pharmaceutical (of which 1 is concerning!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.