There's Reason For Concern Over Modern Chinese Medicine Group Co., Ltd.'s (HKG:1643) Massive 26% Price Jump

Despite an already strong run, Modern Chinese Medicine Group Co., Ltd. (HKG:1643) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 115% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that Modern Chinese Medicine Group's price-to-sales (or "P/S") ratio of 2.2x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in Hong Kong, seeing as it matches the P/S ratio of the wider industry. 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.

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Check out our latest analysis for Modern Chinese Medicine Group

What Does Modern Chinese Medicine Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Modern Chinese Medicine Group 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Modern Chinese Medicine Group will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Modern Chinese Medicine Group?

In order to justify its P/S ratio, Modern Chinese Medicine Group would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 41% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Modern Chinese Medicine Group's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Modern Chinese Medicine Group's P/S?

Modern Chinese Medicine Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at Modern Chinese Medicine Group revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 6 warning signs for Modern Chinese Medicine Group (2 can't be ignored) you should be aware of.

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.