There's Reason For Concern Over Shanghai MicuRx Pharmaceutical Co., Ltd.'s (SHSE:688373) Massive 30% Price Jump

Shanghai MicuRx Pharmaceutical Co., Ltd. (SHSE:688373) shares have continued their recent momentum with a 30% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

After such a large jump in price, given around half the companies in China's Biotechs industry have price-to-sales ratios (or "P/S") below 7.6x, you may consider Shanghai MicuRx Pharmaceutical as a stock to avoid entirely with its 33.7x 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.

View our latest analysis for Shanghai MicuRx Pharmaceutical

How Shanghai MicuRx Pharmaceutical Has Been Performing

With revenue growth that's inferior to most other companies of late, Shanghai MicuRx Pharmaceutical has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio 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 Shanghai MicuRx Pharmaceutical.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai MicuRx Pharmaceutical's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 47% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 60% each year during the coming three years according to the only analyst following the company. That's shaping up to be materially lower than the 177% per year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Shanghai MicuRx Pharmaceutical'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. 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 Final Word

Shanghai MicuRx Pharmaceutical's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It comes as a surprise to see Shanghai MicuRx Pharmaceutical trade at such a high P/S given the revenue forecasts look less than stellar. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shanghai MicuRx 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.