PharmaResources (Shanghai) Co., Ltd.'s (SZSE:301230) P/S Is Still On The Mark Following 39% Share Price Bounce

PharmaResources (Shanghai) Co., Ltd. (SZSE:301230) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 21% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking PharmaResources (Shanghai) is a stock not worth researching with a price-to-sales ratios (or "P/S") of 7.4x, considering almost half the companies in China's Life Sciences industry have P/S ratios below 5.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for PharmaResources (Shanghai)

What Does PharmaResources (Shanghai)'s P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, PharmaResources (Shanghai) has been doing quite well of late. Perhaps the market is expecting the company's future revenue growth to buck the trend of the industry, contributing to a higher P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think PharmaResources (Shanghai)'s future stacks up against the industry? In that case, our free report is a great place to start.

How Is PharmaResources (Shanghai)'s Revenue Growth Trending?

PharmaResources (Shanghai)'s P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. However, a few strong years before that means that it was still able to grow revenue by an impressive 37% 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.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 19% over the next year. With the industry only predicted to deliver 16%, the company is positioned for a stronger revenue result.

With this information, we can see why PharmaResources (Shanghai) is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The large bounce in PharmaResources (Shanghai)'s shares has lifted the company's P/S handsomely. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of PharmaResources (Shanghai)'s analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for PharmaResources (Shanghai) (2 make us uncomfortable) you should be aware 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.