Hubei Hongyuan Pharmaceutical Technology Co., Ltd.'s (SZSE:301246) Business Is Trailing The Industry But Its Shares Aren't

There wouldn't be many who think Hubei Hongyuan Pharmaceutical Technology Co., Ltd.'s (SZSE:301246) price-to-sales (or "P/S") ratio of 3.1x is worth a mention when the median P/S for the Pharmaceuticals industry in China is similar at about 3.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Hubei Hongyuan Pharmaceutical Technology

What Does Hubei Hongyuan Pharmaceutical Technology's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Hubei Hongyuan Pharmaceutical Technology over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Hubei Hongyuan Pharmaceutical Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hubei Hongyuan Pharmaceutical Technology's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Hubei Hongyuan Pharmaceutical Technology's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 25% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 197% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that Hubei Hongyuan Pharmaceutical Technology's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hubei Hongyuan Pharmaceutical Technology's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 3 warning signs for Hubei Hongyuan Pharmaceutical Technology (1 can't be ignored!) that we have uncovered.

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.