The Tonghua Golden-Horse Pharmaceutical Industry Co,Ltd (SZSE:000766) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 172% in the last twelve months.

In spite of the heavy fall in price, given around half the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.1x, you may still consider Tonghua Golden-Horse Pharmaceutical Industry CoLtd as a stock to avoid entirely with its 9.5x 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 so lofty.

View our latest analysis for Tonghua Golden-Horse Pharmaceutical Industry CoLtd

What Does Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Tonghua Golden-Horse Pharmaceutical Industry CoLtd, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Revenue Growth Trending?

Tonghua Golden-Horse Pharmaceutical Industry CoLtd'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.

Retrospectively, the last year delivered a decent 3.8% gain to the company's revenues. The latest three year period has also seen a 12% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S exceeds that of its industry peers. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

A significant share price dive has done very little to deflate Tonghua Golden-Horse Pharmaceutical Industry CoLtd's very lofty 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.

Our examination of Tonghua Golden-Horse Pharmaceutical Industry CoLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Having said that, be aware Tonghua Golden-Horse Pharmaceutical Industry CoLtd is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Tonghua Golden-Horse Pharmaceutical Industry CoLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.