Sihuan Pharmaceutical Holdings Group Ltd.'s (HKG:460) P/S Is On The Mark

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 2.2x, Sihuan Pharmaceutical Holdings Group Ltd. (HKG:460) looks to be giving off strong sell signals with its 6.2x 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.

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Check out our latest analysis for Sihuan Pharmaceutical Holdings Group

How Has Sihuan Pharmaceutical Holdings Group Performed Recently?

Recent times have been advantageous for Sihuan Pharmaceutical Holdings Group 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sihuan Pharmaceutical Holdings Group.

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

In order to justify its P/S ratio, Sihuan Pharmaceutical Holdings Group would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 19% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 36% as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 16% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Sihuan Pharmaceutical Holdings Group's 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.

The Final Word

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.

We've established that Sihuan Pharmaceutical Holdings Group 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. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Sihuan Pharmaceutical Holdings Group with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Sihuan Pharmaceutical Holdings Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.