Tus-Pharmaceutical Group Co., Ltd.'s (SZSE:000590) 37% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Tus-Pharmaceutical Group Co., Ltd. (SZSE:000590) shares have been powering on, with a gain of 37% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.1% over the last year.

Since its price has surged higher, given close to half the companies operating in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.8x, you may consider Tus-Pharmaceutical Group as a stock to potentially avoid with its 5.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Tus-Pharmaceutical Group

How Has Tus-Pharmaceutical Group Performed Recently?

For example, consider that Tus-Pharmaceutical Group's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Tus-Pharmaceutical Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Tus-Pharmaceutical Group?

The only time you'd be truly comfortable seeing a P/S as high as Tus-Pharmaceutical Group's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. Regardless, revenue has managed to lift by a handy 10.0% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 216% 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 Tus-Pharmaceutical Group'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.

What We Can Learn From Tus-Pharmaceutical Group's P/S?

Tus-Pharmaceutical Group's P/S is on the rise since its shares have risen strongly. 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.

Our examination of Tus-Pharmaceutical Group revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

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 you're unsure about the strength of Tus-Pharmaceutical Group'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.