Despite an already strong run, Jiangxi Fushine Pharmaceutical Co., Ltd. (SZSE:300497) shares have been powering on, with a gain of 26% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.7% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Jiangxi Fushine Pharmaceutical's price-to-sales (or "P/S") ratio of 4x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in China, where the median P/S ratio is around 3.5x. 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.

How Has Jiangxi Fushine Pharmaceutical Performed Recently?

For example, consider that Jiangxi Fushine Pharmaceutical's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Jiangxi Fushine Pharmaceutical's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Jiangxi Fushine Pharmaceutical's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 18% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Jiangxi Fushine Pharmaceutical's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now Jiangxi Fushine Pharmaceutical's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Jiangxi Fushine Pharmaceutical revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. 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.

It is also worth noting that we have found 1 warning sign for Jiangxi Fushine Pharmaceutical that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.