Despite an already strong run, Shenyang Xingqi Pharmaceutical Co.,Ltd. (SZSE:300573) shares have been powering on, with a gain of 31% in the last thirty days. The annual gain comes to 144% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, you could be forgiven for thinking Shenyang Xingqi PharmaceuticalLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 23.6x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.7x. 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.

What Does Shenyang Xingqi PharmaceuticalLtd's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Shenyang Xingqi PharmaceuticalLtd has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Shenyang Xingqi PharmaceuticalLtd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 24%. Pleasingly, revenue has also lifted 88% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 47% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 18%, which is noticeably less attractive.

In light of this, it's understandable that Shenyang Xingqi PharmaceuticalLtd's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shenyang Xingqi PharmaceuticalLtd's P/S

The strong share price surge has lead to Shenyang Xingqi PharmaceuticalLtd's P/S soaring as well. 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.

As we suspected, our examination of Shenyang Xingqi PharmaceuticalLtd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about this 1 warning sign we've spotted with Shenyang Xingqi PharmaceuticalLtd.

If these risks are making you reconsider your opinion on Shenyang Xingqi PharmaceuticalLtd, 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.