PharmaEssentia Corporation's (TWSE:6446) 37% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, PharmaEssentia Corporation (TWSE:6446) shares have been powering on, with a gain of 37% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 71% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about PharmaEssentia's P/S ratio of 32.4x, since the median price-to-sales (or "P/S") ratio for the Biotechs industry in Taiwan is also close to 32.9x. 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 PharmaEssentia

What Does PharmaEssentia's P/S Mean For Shareholders?

Recent times haven't been great for PharmaEssentia as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. 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 PharmaEssentia.

Is There Some Revenue Growth Forecasted For PharmaEssentia?

PharmaEssentia's 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.

If we review the last year of revenue growth, the company posted a terrific increase of 67%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 63% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 139% growth forecast for the broader industry.

With this information, we find it interesting that PharmaEssentia is trading at a fairly similar P/S compared to the industry. 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.

What We Can Learn From PharmaEssentia's P/S?

PharmaEssentia's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

When you consider that PharmaEssentia's 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for PharmaEssentia (1 is a bit unpleasant!) that you need to take into consideration.

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.

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