Improved Revenues Required Before ShanXi C&Y Pharmaceutical Group Co.,LTD. (SZSE:300254) Shares Find Their Feet

ShanXi C&Y Pharmaceutical Group Co.,LTD.'s (SZSE:300254) price-to-sales (or "P/S") ratio of 2.5x might make it look like a buy right now compared to the Pharmaceuticals industry in China, where around half of the companies have P/S ratios above 3.2x and even P/S above 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for ShanXi C&Y Pharmaceutical GroupLTD

What Does ShanXi C&Y Pharmaceutical GroupLTD's P/S Mean For Shareholders?

ShanXi C&Y Pharmaceutical GroupLTD has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the respectable revenue performance to degrade, which has repressed the P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

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 ShanXi C&Y Pharmaceutical GroupLTD's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, ShanXi C&Y Pharmaceutical GroupLTD would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 5.7% gain to the company's revenues. Still, lamentably revenue has fallen 8.4% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 134% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why ShanXi C&Y Pharmaceutical GroupLTD's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On ShanXi C&Y Pharmaceutical GroupLTD's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that ShanXi C&Y Pharmaceutical GroupLTD maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for ShanXi C&Y Pharmaceutical GroupLTD that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.