Tonghua Golden-Horse Pharmaceutical Industry Co,Ltd's (SZSE:000766) Popularity With Investors Is Under Threat From Overpricing

When close to half the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3x, you may consider Tonghua Golden-Horse Pharmaceutical Industry Co,Ltd (SZSE:000766) as a stock to avoid entirely with its 8.8x 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.

Check out our latest analysis for Tonghua Golden-Horse Pharmaceutical Industry CoLtd

How Tonghua Golden-Horse Pharmaceutical Industry CoLtd Has Been Performing

Tonghua Golden-Horse Pharmaceutical Industry CoLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Tonghua Golden-Horse Pharmaceutical Industry CoLtd's earnings, revenue and cash flow.

How Is Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Revenue Growth Trending?

Tonghua Golden-Horse Pharmaceutical Industry CoLtd'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.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.8% last year. The latest three year period has also seen a 12% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 17% shows it's noticeably less attractive.

With this in mind, we find it worrying that Tonghua Golden-Horse Pharmaceutical Industry CoLtd'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. 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.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Tonghua Golden-Horse Pharmaceutical Industry CoLtd 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.

Plus, you should also learn about this 1 warning sign we've spotted with Tonghua Golden-Horse Pharmaceutical Industry CoLtd.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.