Subdued Growth No Barrier To Hebei Changshan Biochemical Pharmaceutical Co., Ltd. (SZSE:300255) With Shares Advancing 55%

Despite an already strong run, Hebei Changshan Biochemical Pharmaceutical Co., Ltd. (SZSE:300255) shares have been powering on, with a gain of 55% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 7.7% isn't as impressive.

Since its price has surged higher, you could be forgiven for thinking Hebei Changshan Biochemical Pharmaceutical is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.4x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Hebei Changshan Biochemical Pharmaceutical

How Hebei Changshan Biochemical Pharmaceutical Has Been Performing

For example, consider that Hebei Changshan Biochemical Pharmaceutical's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hebei Changshan Biochemical Pharmaceutical will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Hebei Changshan Biochemical Pharmaceutical would need to produce outstanding growth that's well in excess of 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 42%. The last three years don't look nice either as the company has shrunk revenue by 58% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 141% shows it's an unpleasant look.

With this in mind, we find it worrying that Hebei Changshan Biochemical 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hebei Changshan Biochemical Pharmaceutical's P/S?

The strong share price surge has lead to Hebei Changshan Biochemical Pharmaceutical's P/S soaring as well. 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.

We've established that Hebei Changshan Biochemical Pharmaceutical currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Hebei Changshan Biochemical Pharmaceutical (2 are a bit concerning) you should be aware of.

If these risks are making you reconsider your opinion on Hebei Changshan Biochemical Pharmaceutical, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.