Fujian Cosunter Pharmaceutical Co., Ltd.'s (SZSE:300436) Shares Climb 34% But Its Business Is Yet to Catch Up

Fujian Cosunter Pharmaceutical Co., Ltd. (SZSE:300436) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.

Following the firm bounce in price, you could be forgiven for thinking Fujian Cosunter Pharmaceutical is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.6x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3x. 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 Fujian Cosunter Pharmaceutical

What Does Fujian Cosunter Pharmaceutical's P/S Mean For Shareholders?

Fujian Cosunter Pharmaceutical has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Fujian Cosunter Pharmaceutical's earnings, revenue and cash flow.

How Is Fujian Cosunter Pharmaceutical's Revenue Growth Trending?

Fujian Cosunter 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, we see that the company grew revenue by an impressive 20% last year. Revenue has also lifted 20% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Fujian Cosunter Pharmaceutical is trading at a P/S higher than the industry. 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 We Can Learn From Fujian Cosunter Pharmaceutical's P/S?

Fujian Cosunter Pharmaceutical's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that Fujian Cosunter Pharmaceutical currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Fujian Cosunter Pharmaceutical (2 make us uncomfortable!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.