Hebei Changshan Biochemical Pharmaceutical Co., Ltd. (SZSE:300255) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

Hebei Changshan Biochemical Pharmaceutical Co., Ltd. (SZSE:300255) shares have had a horrible month, losing 25% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 75%, which is great even in a bull market.

Even after such a large drop in price, given around half the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.3x, you may still consider Hebei Changshan Biochemical Pharmaceutical as a stock to avoid entirely with its 5.3x 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.

View our latest analysis for Hebei Changshan Biochemical Pharmaceutical

How Hebei Changshan Biochemical Pharmaceutical Has Been Performing

As an illustration, revenue has deteriorated at Hebei Changshan Biochemical Pharmaceutical over the last year, which is not ideal at all. 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.

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 Hebei Changshan Biochemical Pharmaceutical's earnings, revenue and cash flow.

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

Hebei Changshan Biochemical Pharmaceutical'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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 35%. As a result, revenue from three years ago have also fallen 26% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 43% shows it's an unpleasant look.

In light of this, it's alarming that Hebei Changshan Biochemical Pharmaceutical's 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.

What Does Hebei Changshan Biochemical Pharmaceutical's P/S Mean For Investors?

Hebei Changshan Biochemical Pharmaceutical's shares may have suffered, but its P/S remains high. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Hebei Changshan Biochemical Pharmaceutical revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Hebei Changshan Biochemical Pharmaceutical (of which 2 make us uncomfortable!) you should know about.

If you're unsure about the strength of Hebei Changshan Biochemical Pharmaceutical's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.