Kunming Longjin Pharmaceutical Co., Ltd. (SZSE:002750) May Have Run Too Fast Too Soon With Recent 40% Price Plummet

Unfortunately for some shareholders, the Kunming Longjin Pharmaceutical Co., Ltd. (SZSE:002750) share price has dived 40% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 84% loss during that time.

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 2.9x, you may still consider Kunming Longjin Pharmaceutical as a stock to avoid entirely with its 6.5x 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 Kunming Longjin Pharmaceutical

What Does Kunming Longjin Pharmaceutical's Recent Performance Look Like?

For example, consider that Kunming Longjin Pharmaceutical's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 78% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Kunming Longjin Pharmaceutical's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate 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 Kunming Longjin Pharmaceutical's P/S?

Kunming Longjin Pharmaceutical's shares may have suffered, but its P/S remains high. 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.

We've established that Kunming Longjin Pharmaceutical currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Kunming Longjin Pharmaceutical you should be aware of, and 1 of them shouldn't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com