What Sihuan Pharmaceutical Holdings Group Ltd.'s (HKG:460) 25% Share Price Gain Is Not Telling You

The Sihuan Pharmaceutical Holdings Group Ltd. (HKG:460) share price has done very well over the last month, posting an excellent gain of 25%. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Sihuan Pharmaceutical Holdings Group as a stock probably not worth researching with its 3.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Sihuan Pharmaceutical Holdings Group

What Does Sihuan Pharmaceutical Holdings Group's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Sihuan Pharmaceutical Holdings Group over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sihuan Pharmaceutical Holdings Group's earnings, revenue and cash flow.

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 impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.0%. This means it has also seen a slide in revenue over the longer-term as revenue is down 47% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 8.9% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Sihuan Pharmaceutical Holdings Group's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Sihuan Pharmaceutical Holdings Group's P/S is on the rise since its shares have risen strongly. 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.

Our examination of Sihuan Pharmaceutical Holdings Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you settle on your opinion, we've discovered 1 warning sign for Sihuan Pharmaceutical Holdings Group that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.