What Guangdong Lifestrong Pharmacy Co., Ltd.'s (SZSE:301111) 28% Share Price Gain Is Not Telling You

Guangdong Lifestrong Pharmacy Co., Ltd. (SZSE:301111) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% 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 3.3x, you may consider Guangdong Lifestrong Pharmacy as a stock not worth researching with its 10.2x 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.

Check out our latest analysis for Guangdong Lifestrong Pharmacy

What Does Guangdong Lifestrong Pharmacy's P/S Mean For Shareholders?

For example, consider that Guangdong Lifestrong Pharmacy'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. 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 Guangdong Lifestrong Pharmacy will help you shine a light on its historical performance.

How Is Guangdong Lifestrong Pharmacy's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangdong Lifestrong Pharmacy's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.7% decrease to the company's top line. As a result, revenue from three years ago have also fallen 17% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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

With this information, we find it concerning that Guangdong Lifestrong Pharmacy 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.

The Final Word

Guangdong Lifestrong Pharmacy's P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Guangdong Lifestrong Pharmacy 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.

Before you take the next step, you should know about the 2 warning signs for Guangdong Lifestrong Pharmacy (1 can't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Guangdong Lifestrong Pharmacy, 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.