Shenzhen Hepalink Pharmaceutical Group Co., Ltd.'s (SZSE:002399) 26% Price Boost Is Out Of Tune With Revenues

Shenzhen Hepalink Pharmaceutical Group Co., Ltd. (SZSE:002399) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Even after such a large jump in price, there still wouldn't be many who think Shenzhen Hepalink Pharmaceutical Group's price-to-sales (or "P/S") ratio of 2.9x is worth a mention when the median P/S in China's Pharmaceuticals industry is similar at about 3.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Shenzhen Hepalink Pharmaceutical Group

What Does Shenzhen Hepalink Pharmaceutical Group's Recent Performance Look Like?

Shenzhen Hepalink Pharmaceutical Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Hepalink Pharmaceutical Group.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenzhen Hepalink 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 16%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 6.2% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 10% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 18% growth forecast for the broader industry.

With this information, we find it interesting that Shenzhen Hepalink Pharmaceutical Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Shenzhen Hepalink Pharmaceutical Group's P/S?

Shenzhen Hepalink Pharmaceutical Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at the analysts forecasts of Shenzhen Hepalink Pharmaceutical Group's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Shenzhen Hepalink Pharmaceutical Group with six simple checks on some of these key factors.

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).

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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.