Market Participants Recognise PharmaResources (Shanghai) Co., Ltd.'s (SZSE:301230) Revenues Pushing Shares 30% Higher

PharmaResources (Shanghai) Co., Ltd. (SZSE:301230) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 56%.

Since its price has surged higher, when almost half of the companies in China's Life Sciences industry have price-to-sales ratios (or "P/S") below 5.1x, you may consider PharmaResources (Shanghai) as a stock not worth researching with its 8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for PharmaResources (Shanghai)

How Has PharmaResources (Shanghai) Performed Recently?

With only a limited decrease in revenue compared to most other companies of late, PharmaResources (Shanghai) has been doing relatively well. It seems that many are expecting the comparatively superior revenue performance to persist, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if revenue continues to dissolve.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on PharmaResources (Shanghai).

Is There Enough Revenue Growth Forecasted For PharmaResources (Shanghai)?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like PharmaResources (Shanghai)'s to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow revenue by an impressive 36% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Looking ahead now, revenue is anticipated to climb by 26% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 15%, which is noticeably less attractive.

With this in mind, it's not hard to understand why PharmaResources (Shanghai)'s P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From PharmaResources (Shanghai)'s P/S?

The strong share price surge has lead to PharmaResources (Shanghai)'s P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into PharmaResources (Shanghai) shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for PharmaResources (Shanghai) you should be aware of, and 2 of them can't be ignored.

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.