Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd's (SHSE:688336) price-to-sales (or "P/S") ratio of 13.5x may look like a poor investment opportunity when you consider close to half the companies in the Biotechs industry in China have P/S ratios below 8.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Sunshine Guojian Pharmaceutical (Shanghai)

How Sunshine Guojian Pharmaceutical (Shanghai) Has Been Performing

Sunshine Guojian Pharmaceutical (Shanghai) certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

Sunshine Guojian Pharmaceutical (Shanghai)'s P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 24%. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 3.1% as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 873% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Sunshine Guojian Pharmaceutical (Shanghai)'s P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Sunshine Guojian Pharmaceutical (Shanghai)'s P/S

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.

It comes as a surprise to see Sunshine Guojian Pharmaceutical (Shanghai) trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Sunshine Guojian Pharmaceutical (Shanghai) has 2 warning signs (and 1 which is concerning) we think you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.