Investors Appear Satisfied With Hua Medicine (Shanghai) Ltd.'s (HKG:2552) Prospects

When you see that almost half of the companies in the Pharmaceuticals industry in Hong Kong have price-to-sales ratios (or "P/S") below 1.4x, Hua Medicine (Shanghai) Ltd. (HKG:2552) looks to be giving off strong sell signals with its 21x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Hua Medicine (Shanghai)

How Hua Medicine (Shanghai) Has Been Performing

Recent times have been advantageous for Hua Medicine (Shanghai) as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Hua Medicine (Shanghai)'s Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hua Medicine (Shanghai)'s to be considered reasonable.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. The latest three year period has also seen an excellent 290% overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 816% over the next year. With the industry only predicted to deliver 30%, the company is positioned for a stronger revenue result.

With this information, we can see why Hua Medicine (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.

What Does Hua Medicine (Shanghai)'s P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Hua Medicine (Shanghai) shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hua Medicine (Shanghai) you should know about.

If you're unsure about the strength of Hua Medicine (Shanghai)'s 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.