Why Investors Shouldn't Be Surprised By Ocumension Therapeutics' (HKG:1477) 30% Share Price Surge

Despite an already strong run, Ocumension Therapeutics (HKG:1477) shares have been powering on, with a gain of 30% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 6.2% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking Ocumension Therapeutics is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.9x, considering almost half the companies in Hong Kong's Pharmaceuticals industry have P/S ratios below 1.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for Ocumension Therapeutics

What Does Ocumension Therapeutics' Recent Performance Look Like?

Recent times have been advantageous for Ocumension Therapeutics as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Taking a look back first, we see that the company grew revenue by an impressive 69% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 56% per annum as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 10% per year growth forecast for the broader industry.

With this in mind, it's not hard to understand why Ocumension Therapeutics' 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 Ocumension Therapeutics' P/S?

Ocumension Therapeutics' P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Ocumension Therapeutics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Pharmaceuticals industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Ocumension Therapeutics that you should be aware of.

If you're unsure about the strength of Ocumension Therapeutics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.