CStone Pharmaceuticals' (HKG:2616) 35% Price Boost Is Out Of Tune With Revenues

CStone Pharmaceuticals (HKG:2616) shares have had a really impressive month, gaining 35% after a shaky period beforehand. The annual gain comes to 172% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, it's still not a stretch to say that CStone Pharmaceuticals' price-to-sales (or "P/S") ratio of 11.4x right now seems quite "middle-of-the-road" compared to the Biotechs industry in Hong Kong, where the median P/S ratio is around 12.1x. 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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View our latest analysis for CStone Pharmaceuticals

What Does CStone Pharmaceuticals' Recent Performance Look Like?

CStone Pharmaceuticals hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think CStone Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For CStone Pharmaceuticals?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. Still, the latest three year period has seen an excellent 67% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 7.8% each year over the next three years. That's shaping up to be materially lower than the 414% per annum growth forecast for the broader industry.

In light of this, it's curious that CStone Pharmaceuticals' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

CStone Pharmaceuticals appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

When you consider that CStone Pharmaceuticals' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with CStone Pharmaceuticals, and understanding should be part of your investment process.

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.