The Fuan Pharmaceutical (Group) Co., Ltd. (SZSE:300194) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 16% share price drop.

Following the heavy fall in price, Fuan Pharmaceutical (Group) may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 1.5x, considering almost half of all companies in the Pharmaceuticals industry in China have P/S ratios greater than 3x and even P/S higher than 6x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Fuan Pharmaceutical (Group) Has Been Performing

Fuan Pharmaceutical (Group) has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Fuan Pharmaceutical (Group)'s P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.7% last year. The solid recent performance means it was also able to grow revenue by 5.3% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 35% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Fuan Pharmaceutical (Group) is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does Fuan Pharmaceutical (Group)'s P/S Mean For Investors?

Fuan Pharmaceutical (Group)'s recently weak share price has pulled its P/S back below other Pharmaceuticals companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Fuan Pharmaceutical (Group) confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Fuan Pharmaceutical (Group) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.