Hainan Shuangcheng Pharmaceuticals Co., Ltd.'s (SZSE:002693) Popularity With Investors Under Threat As Stock Sinks 30%

The Hainan Shuangcheng Pharmaceuticals Co., Ltd. (SZSE:002693) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 182% in the last twelve months.

Although its price has dipped substantially, given around half the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.7x, you may still consider Hainan Shuangcheng Pharmaceuticals as a stock to avoid entirely with its 47.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Hainan Shuangcheng Pharmaceuticals

What Does Hainan Shuangcheng Pharmaceuticals' P/S Mean For Shareholders?

For example, consider that Hainan Shuangcheng Pharmaceuticals' financial performance has been poor lately as its revenue has been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Hainan Shuangcheng Pharmaceuticals' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 45% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 201% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Hainan Shuangcheng Pharmaceuticals' 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

Hainan Shuangcheng Pharmaceuticals' shares may have suffered, but its P/S remains high. 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.

We've established that Hainan Shuangcheng Pharmaceuticals currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hainan Shuangcheng Pharmaceuticals, and understanding them should be part of your investment process.

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.