Subdued Growth No Barrier To Hubei Hongyuan Pharmaceutical Technology Co., Ltd. (SZSE:301246) With Shares Advancing 38%

Hubei Hongyuan Pharmaceutical Technology Co., Ltd. (SZSE:301246) shares have had a really impressive month, gaining 38% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 42% over that time.

In spite of the firm bounce in price, there still wouldn't be many who think Hubei Hongyuan Pharmaceutical Technology's price-to-sales (or "P/S") ratio of 3.3x is worth a mention when the median P/S in China's Pharmaceuticals industry is similar at about 3.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Hubei Hongyuan Pharmaceutical Technology

How Hubei Hongyuan Pharmaceutical Technology Has Been Performing

As an illustration, revenue has deteriorated at Hubei Hongyuan Pharmaceutical Technology over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hubei Hongyuan Pharmaceutical Technology's earnings, revenue and cash flow.

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

Hubei Hongyuan Pharmaceutical Technology's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 9.5% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 48% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 141% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Hubei Hongyuan Pharmaceutical Technology is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. 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

Hubei Hongyuan Pharmaceutical Technology's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It is also worth noting that we have found 3 warning signs for Hubei Hongyuan Pharmaceutical Technology (1 doesn't sit too well with us!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.