PharmaResources (Shanghai) Co., Ltd. (SZSE:301230) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.

Although its price has dipped substantially, when almost half of the companies in China's Life Sciences industry have price-to-sales ratios (or "P/S") below 5.1x, you may still consider PharmaResources (Shanghai) as a stock probably not worth researching with its 6.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How PharmaResources (Shanghai) Has Been Performing

PharmaResources (Shanghai)'s revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For PharmaResources (Shanghai)?

The only time you'd be truly comfortable seeing a P/S as high as PharmaResources (Shanghai)'s is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. However, a few strong years before that means that it was still able to grow revenue by an impressive 73% in total over the last three years. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Looking ahead now, revenue is anticipated to climb by 74% during the coming year according to the lone analyst following the company. With the industry only predicted to deliver 11%, the company is positioned for a stronger revenue result.

With this information, we can see why PharmaResources (Shanghai) is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From PharmaResources (Shanghai)'s P/S?

There's still some elevation in PharmaResources (Shanghai)'s P/S, even if the same can't be said for its share price recently. 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.

We've established that PharmaResources (Shanghai) maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Life Sciences industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware PharmaResources (Shanghai) is showing 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

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.