What Hainan Poly Pharm. Co., Ltd's (SZSE:300630) 46% Share Price Gain Is Not Telling You

Despite an already strong run, Hainan Poly Pharm. Co., Ltd (SZSE:300630) shares have been powering on, with a gain of 46% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 42% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.5x, you may consider Hainan Poly Pharm as a stock probably not worth researching with its 4.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Hainan Poly Pharm

How Has Hainan Poly Pharm Performed Recently?

For instance, Hainan Poly Pharm's receding revenue in recent times would have to be some food for thought. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Hainan Poly Pharm?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Hainan Poly Pharm's to be considered reasonable.

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 1.7%. As a result, revenue from three years ago have also fallen 9.8% overall. 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 information, we find it concerning that Hainan Poly Pharm is trading at a P/S higher than the industry. 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.

The Final Word

Hainan Poly Pharm shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Hainan Poly Pharm 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Hainan Poly Pharm (2 are concerning) you should be aware of.

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.