The CStone Pharmaceuticals (HKG:2616) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 59% loss during that time.

Following the heavy fall in price, CStone Pharmaceuticals may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 4.8x, considering almost half of all companies in the Biotechs industry in Hong Kong have P/S ratios greater than 11.6x and even P/S higher than 29x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for CStone Pharmaceuticals

How CStone Pharmaceuticals Has Been Performing

Recent times haven't been great for CStone Pharmaceuticals as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as CStone Pharmaceuticals' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 61% during the coming year according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 78%, which is noticeably more attractive.

With this information, we can see why CStone Pharmaceuticals is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

CStone Pharmaceuticals' P/S looks about as weak as its stock price lately. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of CStone Pharmaceuticals' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for CStone Pharmaceuticals you should be aware of.

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.