Hainan Shuangcheng Pharmaceuticals Co., Ltd. (SZSE:002693) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 27% share price drop.

Even after such a large drop in price, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.2x, you may still consider Hainan Shuangcheng Pharmaceuticals as a stock not worth researching with its 7.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Hainan Shuangcheng Pharmaceuticals Performed Recently?

For instance, Hainan Shuangcheng Pharmaceuticals' receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hainan Shuangcheng Pharmaceuticals' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.1%. As a result, revenue from three years ago have also fallen 2.8% overall. 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 41% 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 Hainan Shuangcheng Pharmaceuticals' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Hainan Shuangcheng Pharmaceuticals' shares may have suffered, but its P/S remains high. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Hainan Shuangcheng Pharmaceuticals 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you settle on your opinion, we've discovered 2 warning signs for Hainan Shuangcheng Pharmaceuticals that you should be aware of.

If you're unsure about the strength of Hainan Shuangcheng Pharmaceuticals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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