Jiangsu Aidea Pharmaceutical Co., Ltd.'s (SHSE:688488) Shares Climb 27% But Its Business Is Yet to Catch Up

Jiangsu Aidea Pharmaceutical Co., Ltd. (SHSE:688488) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 25%.

Since its price has surged higher, you could be forgiven for thinking Jiangsu Aidea Pharmaceutical is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.9x, 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 Jiangsu Aidea Pharmaceutical

How Jiangsu Aidea Pharmaceutical Has Been Performing

With revenue growth that's exceedingly strong of late, Jiangsu Aidea Pharmaceutical has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jiangsu Aidea Pharmaceutical will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 68% last year. Pleasingly, revenue has also lifted 42% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 164% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Jiangsu Aidea Pharmaceutical's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

The Final Word

Shares in Jiangsu Aidea Pharmaceutical have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Jiangsu Aidea Pharmaceutical currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Jiangsu Aidea Pharmaceutical 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.