What Hainan Haiyao Co., Ltd.'s (SZSE:000566) 31% Share Price Gain Is Not Telling You

Despite an already strong run, Hainan Haiyao Co., Ltd. (SZSE:000566) shares have been powering on, with a gain of 31% in the last thirty days. Looking further back, the 10% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Hainan Haiyao as a stock not worth researching with its 5.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Hainan Haiyao

What Does Hainan Haiyao's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Hainan Haiyao over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Hainan Haiyao's earnings, revenue and cash flow.

How Is Hainan Haiyao's Revenue Growth Trending?

Hainan Haiyao'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.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 48% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 153% shows it's an unpleasant look.

In light of this, it's alarming that Hainan Haiyao's P/S sits above the majority of other companies. 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.

The Key Takeaway

Shares in Hainan Haiyao 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 established that Hainan Haiyao currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you settle on your opinion, we've discovered 1 warning sign for Hainan Haiyao that you should be aware of.

If you're unsure about the strength of Hainan Haiyao's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.