Optimistic Investors Push Tus-Pharmaceutical Group Co., Ltd. (SZSE:000590) Shares Up 32% But Growth Is Lacking

Tus-Pharmaceutical Group Co., Ltd. (SZSE:000590) shares have had a really impressive month, gaining 32% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 36%.

After such a large jump in price, you could be forgiven for thinking Tus-Pharmaceutical Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.3x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.3x. 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 Tus-Pharmaceutical Group

How Tus-Pharmaceutical Group Has Been Performing

As an illustration, revenue has deteriorated at Tus-Pharmaceutical Group 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 Tus-Pharmaceutical Group's earnings, revenue and cash flow.

How Is Tus-Pharmaceutical Group's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 10.0% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 206% shows it's noticeably less attractive.

With this information, we find it concerning that Tus-Pharmaceutical Group is trading at a P/S higher than the industry. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Tus-Pharmaceutical Group's P/S Mean For Investors?

Shares in Tus-Pharmaceutical Group have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Tus-Pharmaceutical Group 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Tus-Pharmaceutical Group that you should be aware of.

If these risks are making you reconsider your opinion on Tus-Pharmaceutical Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.