What SMS Pharmaceuticals Limited's (NSE:SMSPHARMA) 27% Share Price Gain Is Not Telling You

SMS Pharmaceuticals Limited (NSE:SMSPHARMA) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last month tops off a massive increase of 168% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about SMS Pharmaceuticals' P/S ratio of 2.9x, since the median price-to-sales (or "P/S") ratio for the Pharmaceuticals industry in India is also close to 2.8x. 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.

View our latest analysis for SMS Pharmaceuticals

What Does SMS Pharmaceuticals' P/S Mean For Shareholders?

Recent times have been quite advantageous for SMS Pharmaceuticals as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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 SMS Pharmaceuticals' earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

SMS Pharmaceuticals' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered an exceptional 36% gain to the company's top line. The latest three year period has also seen a 26% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that SMS Pharmaceuticals' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From SMS Pharmaceuticals' P/S?

SMS 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.

We've established that SMS Pharmaceuticals' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Having said that, be aware SMS Pharmaceuticals is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on SMS Pharmaceuticals, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com